-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, WS2gsEGVqZ6j+dGnAkMQ7DyFNEwg5ZMp9vU8ae6YjJV7WyGwAajD+MmetG4WML1k nIsn0B4WH37AhY4mAN4AgQ== 0000940180-99-001296.txt : 19991105 0000940180-99-001296.hdr.sgml : 19991105 ACCESSION NUMBER: 0000940180-99-001296 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 12 CONFORMED PERIOD OF REPORT: 19990731 FILED AS OF DATE: 19991104 FILER: COMPANY DATA: COMPANY CONFORMED NAME: IDT CORP CENTRAL INDEX KEY: 0001005731 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER INTEGRATED SYSTEMS DESIGN [7373] IRS NUMBER: 223415036 STATE OF INCORPORATION: DE FISCAL YEAR END: 0731 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-27898 FILM NUMBER: 99741288 BUSINESS ADDRESS: STREET 1: 190 MAIN ST CITY: HACKENSACK STATE: NJ ZIP: 07601 BUSINESS PHONE: 2019281000 MAIL ADDRESS: STREET 1: 294 STATE STREET CITY: HACKENSACK STATE: NJ ZIP: 07601 10-K 1 FORM 10-K - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 --------------- FORM 10-K FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED JULY 31, 1999, OR [_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. Commission File Number: 0-27898 IDT CORPORATION (Exact name of registrant as specified in its charter) Delaware 22-3415036 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 190 Main Street Hackensack, New Jersey 07601 (Address of principal executive offices, including zip code) (201) 928-1000 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $.01 per share (Title of class) Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [_] The aggregate market value of the voting stock held by non-affiliates of the Registrant, based on the closing price of the Common Stock on October 29, 1999 of $22.875, as reported on the Nasdaq National Market, was approximately $547 million (assuming the conversion of all of the Company's shares of Class A Common Stock into Common Stock). Shares of Common Stock held by each officer and director and by each person who owns 5% or more of the outstanding Common Stock (assuming conversion of the Registrant's Class A Common Stock) have been excluded from this computation, in that such persons may be deemed to be affiliates of the Registrant. This determination of affiliate status is not necessarily a conclusive determination for any other purpose. As of October 29, 1999, the Registrant had outstanding 24,100,383 shares of Common Stock, $.01 par value, and 10,029,758 shares of Class A Common Stock, $.01 par value. DOCUMENTS INCORPORATED BY REFERENCE Certain information in the Registrant's definitive Proxy Statement for its 1999 Annual Meeting of Stockholders, which will be filed with the Securities and Exchange Commission pursuant to Regulation 14A, not later than 120 days after July 31, 1999, is incorporated by reference in Part III (Items 10, 11, 12 and 13) of this Form 10-K. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- INDEX IDT CORPORATION ANNUAL REPORT ON FORM 10-K
Page No. -------- PART I Item 1. Business............................................... 1 Item 2. Properties............................................. 32 Item 3. Legal Proceedings...................................... 32 Item 4. Submission of Matters to a Vote of Security Holders.... 33 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.................................... 34 Item 6. Selected Financial Data................................ 35 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................... 36 Item 7A. Quantitative and Qualitative Disclosures about Market Risks.................................................. 46 Item 8. Financial Statements and Supplementary Data............ 46 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure................... 46 PART III Item 10. Directors and Executive Officers of the Registrant..... 47 Item 11. Executive Compensation................................. 47 Item 12. Security Ownership of Certain Beneficial Owners and Management............................................. 47 Item 13. Certain Relationships and Related Transactions......... 47 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K............................................... 48 SIGNATURES.......................................................... 50 Index to Consolidated Financial Statements.......................... F-1
PART I Item 1. BUSINESS. Summary As used in this Annual Report, unless the context otherwise requires, the terms "the Company" and "IDT" refer to IDT Corporation, a Delaware corporation, its predecessor, International Discount Telecommunications, Corp., a New York corporation ("IDT New York"), and their subsidiaries, collectively. All information in this Annual Report gives effect to the 1995 reincorporation of the Company in Delaware. The Company's fiscal year ends on July 31 of each calendar year. Each reference to a Fiscal Year in this Annual Report refers to the Fiscal Year ending in the calendar year indicated (e.g., Fiscal 1999 refers to the Fiscal Year ended July 31, 1999). IDT Corporation is a leading facilities-based emerging multinational carrier that provides a broad range of telecommunications services to wholesale and retail customers worldwide. The company offers integrated and competitively priced international and domestic long distance telecommunications service and Internet access. The Company's majority-owned Net2Phone, Inc. ("Net2Phone") (NASDAQ: NTOP) subsidiary offers a variety of Internet telephony products and services. The Company's telecommunications services include wholesale carrier services, prepaid calling cards, international retail services and domestic long distance services. The Company has grown considerably in recent years, generating revenues of $135.2 million, $335.4 million and $732.2 million in Fiscal 1997, Fiscal 1998 and Fiscal 1999, respectively. IDT delivers its telecommunications services over a high-quality network consisting of 70 switches in the U.S. and Europe and owned and leased capacity on 16 undersea fiber optic cables. In addition, the Company obtains additional transmission capacity from other carriers. The Company delivers its international traffic worldwide pursuant to its agreements with U.S.-based carriers, foreign carriers, and 23 of the companies that are primarily responsible for providing telecommunications services in particular countries (many of which are commonly referred to as "Post, Telephone and Telegraphs," or "PTTs"). In addition, IDT maintains a high-speed network that carries Internet traffic in order to support both its Internet access services and Net2Phone's Internet telephony services. As of October 1, 1999, the Company had approximately 125 wholesale customers located in the U.S. and Europe. In addition, IDT offers retail long distance services to individual and business customers in the U.S. and worldwide. Within the U.S., IDT provides dedicated and dial-up Internet access services to approximately 65,000 retail customers. Net2Phone's Web-based Internet telephony services, which allow customers to make telephone calls from a multimedia PC to any telephone, and the Net2Phone Direct service, which enables users to make phone-to-phone calls over the Internet, have been used by a total of over 1.8 million registered customers worldwide. The Company operates a growing telecommunications network consisting of (i) 70 Excel and Nortel switches in the U.S. and Europe; (ii) 16 owned and leased undersea fiber optic cables connecting the Company's U.S. facilities with its international facilities and with the facilities of its foreign partners in Europe, Latin America and Asia; and (iii) resale transmission capacity obtained on a per-minute basis from other telephone carriers. The Company monitors its network 24 hours a day, seven days a week through an automated network operations center. The Company plans to expand its global telecommunications network infrastructure, in order to allow the Company to route a greater percentage of its international long distance traffic over owned lines. Routing calls over owned lines, rather than leased lines, will help the Company to reduce its operating costs, ensure the quality of its service and expand its customer base. However, the Company follows a disciplined, incremental approach to expanding its network, adding new facilities only when it determines that such investments are justified by traffic volumes. Generally, IDT enters new markets by leasing fiber capacity. As traffic grows, the Company typically invests in bandwith to realize cost savings from routing calls over an owned network. As traffic 1 increases further, the Company may install a switch to increase overall capacity. If volume continues to grow, the Company may deploy additional switching and/or fiber capacity. IDT installed company-owned switches in the U.K. and the Netherlands in Fiscal 1999. The company plans to install and/or upgrade facilities in France, Italy, Spain, Germany and Austria by the end of Fiscal 2000, and to continue to pursue operating agreements with foreign carriers in order to terminate traffic directly at favorable rates. IDT also operates a domestic Internet network consisting of multiple leased lines. IDT's Internet access networks provide local dial-up access through 33 "points of presence" (or "POPs") owned by the Company, through which subscribers may access the Internet. The Company's domestic Internet network also includes about 375 additional POPs owned by local and regional Internet service providers, which the Company refers to as its "Alliance Partners,". This Internet network, combined with the Company's telecommunications network, is also used to route Net2Phone's Internet telephony traffic. History The Company was founded in August 1990 and was originally incorporated in New York as "International Discount Telecommunications Corp." The Company was renamed IDT Corporation and reincorporated in Delaware in December 1995. The Company's main offices are located at 190 Main Street, Hackensack, New Jersey 07601; its telephone number is (201) 928-1000. IDT's Internet address is www.idt.net. The Company entered the telecommunications business by introducing its international call reorigination service in 1990 to capitalize on the opportunity created by the large spread between U.S. and foreign-originated international long distance telephone rates. Long distance calling costs in certain highly regulated international markets are often prohibitive. The Company's call reorigination service enables customers to access a U.S. dial tone from overseas and place international calls that are reoriginated in the U.S. The customer benefits from more favorable U.S. outbound long distance rates and superior transmission quality. IDT used the expertise derived from, and the calling volume generated by, its call reorigination business to enter the domestic long distance business in late 1993 by reselling long distance services of other carriers to its domestic customers. As a value-added service for its domestic long distance customers, the Company began offering Internet access in early 1994, eventually offering dial-up and dedicated Internet access to individuals and businesses as stand-alone services. In 1995, IDT began reselling to other long distance carriers access to the favorable telephone rates and special tariffs the Company receives as a result of the calling volume generated by its call reorigination customers. The Company began marketing its prepaid calling cards in January 1997. IDT entered the Internet telephony market in August 1996 with its introduction of PC2Phone, the first commercial telephone service to connect calls between personal computers and telephones over the Internet. The Company expanded its Internet telephony offerings in September 1997 with the introduction of Net2Phone Direct, a service that enables users to make international and domestic calls over the Internet using standard telephones. In April 1998, the Company launched Click2Talk, an Internet telephony product which allows customers to make calls to the toll-free numbers of e-commerce companies anywhere in the world using a PC. In August 1998, the Company introduced Click2CallMe, which allows consumers visiting e-commerce companies to contact customer sales representatives from the Web sites of such companies without charge. Offerings of Net2Phone On August 3, 1999, Net2Phone completed an initial public offering of 6,210,000 shares of its Common Stock (the "Initial Public Offering"), yielding $85.3 million in net proceeds, to be used for development and maintenance of strategic Internet relationships, advertising and promotion, research and development, the upgrading and expansion of its network and general corporate purposes, including working capital. Prior to the Initial Public Offering, Net2Phone was a 90%-owned direct subsidiary of the Company. As such, Net2Phone received various services provided by the Company, including administration (accounting, human resources, legal), customer support, telecommunications and joint marketing. The Company also provided Net2Phone with a number of its executives and employees. The Company has historically allocated a portion of its overhead costs related to those services it provided to Net2Phone. None of these services were provided to Net2Phone pursuant to any written agreement between the Company and Net2Phone. 2 After the Initial Public Offering, the Company owned 56.2% of the capital stock of Net2Phone. The Company owns Class A stock that has twice the voting power of Net2Phone's common stock. Therefore, after the Initial Public Offering, the Company controlled 64.0% of Net2Phone's vote. In connection with Net2Phone's Initial Public offering, the Company entered into several agreements with Net2Phone, including an assignment agreement, a separation agreement, an IDT services agreement, a Net2Phone services agreement, a tax sharing and indemnification agreement, a joint marketing agreement and an Internet/telecommunications agreement. On November 4, 1999 Net2Phone filed a registration statement with the Securities and Exchange Commission for the sale of 6,300,000 shares of common stock (the "November Offering"). Of the 6,300,000 shares to be sold in the November Offering, 3,400,000 shares are being sold by Net2Phone. The Company will be selling 2,200,000 shares, with the remaining 700,000 shares to be sold by other selling stockholders. The underwriters have also been granted an option for a period of 30 days to purchase up to 900,000 additional shares of common stock from other selling stockholders to cover over-allotments, if any. This Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Such forward-looking statements include, among other things, the Company's plans to implement its growth strategy, improve its financial performance, expand its infrastructure, develop new products and services, expand its sales force, expand its customer base and enter international markets. Such forward-looking statements also include the Company's expectations concerning factors affecting the markets for its products, such as changes in the U.S. and the international regulatory environment and the demand for long-distance telecommunications, Internet access and Internet telephony services. Actual results could differ from those projected in any forward-looking statements. The forward-looking statements are made as of the date of this Annual Report on Form 10-K, and the Company assumes no obligation to update the forward-looking statements, or to update the reasons why actual results could differ from those projected in the forward-looking statements. Investors should consult all of the information set forth herein and the other information set forth from time to time in the Company's Reports on Forms 10-Q and 8-K. Industry Overview The international long distance industry, which principally consists of the transmission of voice and data between countries, is undergoing a period of rapid, fundamental change that has resulted, and is expected to continue to result, in significant growth in the usage of international telecommunications services. According to industry sources, in 1997, the international long distance telecommunications industry accounted for approximately 81.8 billion minutes of use, an increase of 14% from 71.7 billion minutes of use in 1996, and up from approximately 24.6 billion minutes of use in 1988. The international long distance telecommunications industry generated revenues of approximately $67.0 billion in 1997. Industry sources have estimated that by 2001 this market may approach $98.0 billion in revenues and 143.2 billion minutes of use, representing compound annual growth rates from 1997 of 10.0% and 15.0%, respectively. The Company believes that growth in international long distance services is being driven by (i) the globalization of the world's economies and the worldwide trend toward deregulation of the telecommunications sector; (ii) declining prices arising from increased competition generated by privatization and deregulation; (iii) increased worldwide telephone density and accessibility arising from technological advances and greater investment in telecommunications infrastructure, including the deployment of wireless networks; (iv) a wider selection of products and services; and (v) the growth in the transmission of data traffic via internal company networks and the Internet. The Company believes that growth of traffic originated in markets outside the U.S. will be higher than growth in traffic originated within the U.S. due to recent deregulation in many foreign markets, relative economic growth rates and increasing access to telecommunications facilities in emerging markets. 3 Globalization: The increased globalization of commerce, trade and travel has stimulated demand for international long distance services, which in turn has spurred the continuing deregulation and privatization of telecommunications markets, which have traditionally been served by state-owned monopoly providers. In the U.S., demand for international long distance services has been boosted by a continued surge of immigrants to the U.S. These immigrants often seek a way to make inexpensive international calls to their friends and relatives back in their country of origin, using any telephone, without needing to demonstrate a credit history. The debit calling card remains the preferred vehicle for fulfilling these needs. The company believes that it is currently the top provider of international debit card calling time from the U.S., putting it in position to benefit from this trend. Declining prices: The reduction of outbound international long distance rates, resulting from the increased competition generated by deregulation and privatization, continues to make international calling available to a much larger customer base. This, in turn, has stimulated increased traffic volumes. Increased teledensity: Stimulated by economic growth and development, government initiatives and technological advances, the number of telephone lines around the world has increased dramatically, and is expected to lead to greater demand for international telecommunications services. Wider selection of products and services: The proliferation of communications devices, including cellular telephones, facsimile machines, pagers, data communications devices and communications equipment has led to a general increase in the use of telecommunications services. In addition, a growing number of products and services are available to an increasing portion of the world's population. This availability is driving the increasing demand for these services on both a singular and bundled basis, requiring carriers to offer a wide array of voice and data products and services. Growth of data traffic: The increased availability of higher-quality and higher-capacity bandwith has enabled international long distance carriers to improve service quality and provide a wider array of data services, while also lowering costs. The demand for data services, including Internet based demand, has increased rapidly, and is expected to continue to increase at a robust pace in the foreseeable future. Regulatory and Competitive Environment Consumer demand and competitive initiatives have acted as catalysts for government deregulation, especially in developed countries. Deregulation accelerated in the U.S. in 1984 with the divestiture by American Telephone & Telegraph, Inc. ("AT&T") of the regional bell operating companies. Today, there are over 500 U.S. long distance companies, most of which are small or medium-sized companies. In order to be successful, these small and medium- sized companies typically offer their customers a full range of services, including international long distance. However, most of these carriers do not have the critical mass of customers to receive volume discounts on international traffic from the larger facilities-based carriers such as AT&T, MCI WorldCom, Inc. ("MCI WorldCom") and Sprint Corporation ("Sprint"). In addition, these companies have only a limited ability to invest in international facilities. Alternative international carriers, such as the Company, have capitalized on this demand for less expensive international transmission facilities. These alternative international carriers are able to take advantage of larger traffic volumes in order to obtain volume discounts on international routes (resale traffic) and/or invest in facilities when the volume of particular routes justifies such investments. As these emerging international carriers have become established, they have also begun to carry overflow traffic from the larger long distance providers that own overseas transmission facilities. Deregulation in the U.K. began in 1981 when Mercury, a subsidiary of Cable & Wireless plc, was granted a license to operate a facilities-based network and compete with British Telecommunications plc ("BT"). Deregulation spread to other European countries with the adoption of the "Directive on Competition in the Markets for Telecommunication Services" in 1990. A series of subsequent European Union directives, reports and actions have resulted in significant but not complete deregulation of the telecommunications industries in most European Union member states. Further deregulation of the European Union telecommunications market is scheduled to occur in 2000 upon the implementation of the European Union's "Amending Directive to the 4 Interconnection Directive," which mandates the introduction of equal access and carrier pre-selection by 2000. See "Regulation--European Regulation of Telecommunications Services." A similar movement toward deregulation has already taken place in Australia and New Zealand, and is also taking place in Japan, Mexico, Hong Kong and other markets. Other governments have begun to allow competition for value-added and other selected telecommunications services and features, including data and facsimile services and certain restricted voice services. Deregulation and privatization have also allowed new long distance providers to emerge in other foreign markets. In many countries, however, the rate of change and emergence of competition remain slow, and the timing and extent of future deregulation is uncertain. On February 15, 1997, the U.S. and 68 other countries signed the WTO Agreement and agreed to open their telecommunications markets to competition and foreign ownership starting in January 1998. These 69 countries represent approximately 95% of worldwide telecommunications traffic. The Company believes that the WTO Agreement will provide IDT with significant opportunities to compete in markets in which it did not previously have access, and to provide facilities-based services to and from these countries. The Federal Communications Commission ("FCC") issued an order that significantly reduces U.S. regulation of international services in order to implement the U.S.'s commitments under the WTO Agreement. This order is expected to increase opportunities for foreign carriers to compete in the U.S. communications market, while increasing the opportunities for U.S. carriers to enter foreign markets and to develop alternative termination arrangements with carriers that lack market power in other countries. Deregulation has encouraged competition, which in turn has prompted carriers to offer a wider selection of products and services at lower prices. The Company believes that the lower prices for telecommunications services that have resulted from increased competition have been more than offset by decreases in the costs of providing such services and increases in telecommunications usage. For example, based on FCC data for the period 1989 through 1995, per-minute settlement payments by U.S.-based carriers to foreign PTTs fell 31.4%, from $0.70 per minute to $0.48 per minute. Over this same period, however, per-minute international billed revenues fell only 13.7%, from $1.02 in 1989 to $0.88 in 1995. The Company believes that as settlement rates and capacity costs continue to decline, international long distance will continue to provide opportunities to generate relatively high revenues and per-minute gross profits. International Switched Long Distance Services International switched long distance services are provided through switching and transmission facilities that automatically route calls to circuits based upon a predetermined set of routing criteria. In the U.S., an international long distance call typically originates on a local exchange carrier's network and is switched to the caller's domestic long distance carrier. The domestic long distance provider then carries the call to its own or to another carrier's international gateway switch. From there it is carried to a corresponding gateway switch operated in the country of destination by the dominant carrier of that country and then is routed to the party being called through that country's domestic telephone network. International long distance providers can generally be categorized by the extent of their ownership and use of switches and transmission facilities. The largest U.S. carriers, AT&T, MCI WorldCom and Sprint primarily utilize owned U.S. transmission facilities and tend to use other international long distance providers to reach niche markets where they do not own a network, to take advantage of lower prices, and to carry their overflow traffic. Since no carrier has transmission facilities that cover the more than 200 countries to which major long distance providers offer service, a significantly larger group of long distance providers has emerged, which own and operate their own switches but either rely solely on resale agreements with other long distance carriers to terminate traffic or use a combination of resale agreements and leased or owned facilities in order to terminate their traffic, as discussed below. Operating Agreements. Operating agreements provide for the termination of traffic in, and return traffic from, the international long distance providers that have rights in facilities in different countries at a negotiated accounting rate. Almost all international calls are carried under the complex accounting rate system, a framework 5 for originating, carrying and terminating calls that has been in place since just after World War II. Within each country, the regulatory authority negotiates rates with a foreign PTT. These accounting rates tend to be artificially inflated, with no relation to the actual costs of carrying traffic. Under a traditional operating agreement, the international long distance provider that originates more traffic compensates the long distance provider in the other country by paying an amount determined by multiplying the net traffic imbalance (the difference between minutes sent and minutes received) by the settlement rate, which is generally one-half the accounting rate. Under a typical operating agreement, each carrier has a right in its portion of the transmission facilities between two countries. A carrier gains ownership rights in a fiber optic cable by purchasing direct ownership in a particular cable (usually prior to the time that the cable is placed in service) by acquiring an "indefeasible right of use" (IRU), in a previously installed cable, or by leasing or obtaining capacity from another long distance provider that either has direct ownership or IRU rights in the cable. In situations where a long distance provider has sufficiently high traffic volume, routing calls across an indefeasible right of use or leased cable capacity is generally more cost-effective on a per-call basis than the use of resale arrangements with other long distance providers. However, leased capacity and acquisition of an indefeasible right of use requires a substantial initial investment based on the amount of capacity acquired. Transit Arrangements. In addition to utilizing an operating agreement to terminate traffic delivered from one country directly to another, an international long distance provider may enter into transit agreements. Under these arrangements, a long distance provider in an intermediate country carries the traffic to the country of destination. Switched Resale Arrangements. A switched resale arrangement typically involves the wholesale purchase of termination services on a variable, per- minute basis by one long distance provider from another. A single international call may pass through the facilities of several long distance resellers before it reaches the foreign facilities-based carrier that ultimately terminates the call. Such resale, first permitted with the deregulation of the U.S. market, enabled the emergence of alternative international providers that relied, at least in part, on transmission services acquired on a wholesale basis from other providers. Resale arrangements set per-minute prices for different routes, which may be guaranteed for a set time period or which may be subject to change. The resale market for international transmission is extremely dynamic in nature, as new long distance resellers emerge, and as existing providers respond to fluctuating costs and competitive pressures. In order to effectively manage costs when utilizing resale arrangements, long distance providers need timely access to changing market data and must quickly react to changes in costs through pricing adjustments or routing decisions. Alternative Transit/Termination Arrangements. As the international long distance market began to deregulate, long distance providers developed alternative transit/termination arrangements in an effort to decrease their costs of terminating international traffic. Some of the more significant arrangements include refiling, international simple resale and ownership of switching facilities in foreign countries. Refiling and transiting of traffic, which take advantage of disparities in settlement rates between different countries, allow traffic to a destination country to be treated as if it originated in another country that benefits from lower settlement rates with the destination country, thereby resulting in a lower overall termination cost. The difference between transit and refiling is that, with respect to transit, the long distance provider in the destination country has a direct relationship with the originating long distance provider and is aware of the arrangement, while with refiling, it is likely that the long distance provider in the destination country is not aware of the country in which the traffic originated or of the originating carrier. To date, the FCC has made no pronouncement as to whether refiling complies with either U.S. regulations or the regulations of the International Telecommunication Union. Under international simple resale, a long distance provider completely bypasses the accounting rate system by connecting an international leased private line (i) to the public switched telephone network of two countries 6 or (ii) directly to the premises of a customer or partner in one country and the public switched telephone network in the other country. While international simple resale is currently only sanctioned by applicable regulatory authorities on a limited number of routes, including U.S.-U.K., U.S.-Canada, U.S.-Sweden, U.S.-New Zealand, U.S.-Australia, U.S.-Netherlands, U.K.-worldwide, Canada-U.K. and U.S.-Japan, it is increasing in use and is expected to expand significantly as deregulation of the international telecommunications market continues. In addition, deregulation has made it possible for U.S.-based long distance providers to establish their own switching facilities in certain foreign countries, enabling them to terminate traffic directly. Competitive Opportunities and Advances in Telecommunications Technology The combination of a continually expanding global telecommunications market, consumer demand for lower prices with improved quality and service, and ongoing deregulation has created competitive opportunities in many countries. Similarly, new technologies, including fiber optic cable and improvements in digital compression, have improved quality and increased transmission capacities and speed, with transmission costs decreasing as a result. In addition, the growth of the Internet as a communications medium, and advances in packet switching technology and Internet telephony are expected to have an increasing impact on the international telecommunications market. Advances in technology have created a variety of ways for telecommunications carriers to provide customer access to their networks and services. These include customer-paid local access, international and domestic toll-free access, direct digital access through dedicated lines, equal access through automated routing from the public switched telephone network, call reorigination and Internet telephony. The type of access offered depends on the proximity of switching facilities to the customer, the needs of the customer, and the regulatory environment in which the carrier competes. Overall, these changes have resulted in a trend towards bypassing traditional international long distance operating agreements as international long distance companies seek to operate more efficiently. In a deregulated country such as the U.S., carriers can establish switching facilities, own or lease fiber optic cable, enter into operating agreements with foreign carriers and, accordingly, provide direct access service. In markets that have not deregulated or are slow in implementing deregulation, international long distance carriers have used advances in technology to develop innovative alternative access methods, such as call reorigination. In other countries, where deregulation has commenced but has not been completed, carriers are permitted to offer data and facsimile services, as well as limited voice services including those to closed user groups, but are not yet permitted to offer full voice telephony. As countries deregulate, the demand for alternative access methods typically decreases because carriers are permitted to offer a wider range of facilities-based services on a transparent basis. The most common form of alternative international access, traditional call reorigination, avoids the high international rates offered by the dominant carrier in a particular regulated country by providing the user with a dial tone from a deregulated country, typically the U.S. To place a call using traditional call reorigination, a user dials a unique phone number to an international carrier's switching center and then hangs up after it rings. The user then receives an automated callback providing a dial tone from the U.S. which enables the user to complete the call. Technical innovations, ranging from inexpensive dialers to sophisticated in-country switching platforms, have enabled telecommunications carriers to offer a "transparent" form of call reorigination. The customer dials into the local switch, and then dials the international number in the usual fashion, without the "hang-up" and "callback," and the international call is automatically and rapidly processed. The Company believes that as deregulation occurs and competition increases in various markets around the world, the pricing advantage of traditional call reorigination to most destinations relative to conventional international direct dial service will diminish in those markets. Developments in the Internet Industry Use of the Internet has grown rapidly since its initial commercialization in the early 1990's. However, determining the precise number of Internet users is extremely difficult because (i) the Internet does not have a 7 single point of control from which statistics may be recorded; (ii) computers are connected and disconnected from the Internet on a continual basis; and (iii) a large number of users may access the Internet through a single network. International Data Corporation ("IDC") estimates that the number of Internet users worldwide will increase from approximately 69 million in 1997 to 320 million in 2002, representing a compound annual growth rate of 36%. Forrester Research projects that revenue from Internet access services in the U.S. will grow from $6.5 billion in 1998, to $21.8 billion in 2002, a compound annual growth rate of 35%. The Internet has evolved dramatically over the last several years as a result of several trends affecting the computer and communications industries. These trends include (i) the migration by organizations from proprietary mainframe environments to open systems and distributed computing; (ii) the emergence of low-cost, high-capacity telecommunications bandwidth; (iii) the increased use of PCs in the home; (iv) the increased percentage of PCs that are equipped with modems; (v) the growth of commercial on-line services; (vi) the growth of information, entertainment and commercial applications; (vii) the increase in the number and variety of services available on the Internet; and (viii) the widening acceptance of Internet-based transactions ("e-commerce") as reliable and more convenient substitutes for transactions conducted through more traditional means. Through an Internet connection, users can access commercial, educational and governmental databases, software, graphics, newspapers, magazines, library catalogs, industry newsletters, and other information. Currently, the primary uses of the Internet include e-mail, Web browsing, electronic commerce, file transfers, remote log-in, news, bulletin boards, chat services and other on-line services. In addition, during the last few years, several navigational and utility tools have become available that have enabled easier access to the resources of the Internet. Navigational software such as Netscape Navigator and Microsoft's Internet Explorer, and search tools from such companies as Excite@Home Corp., InfoSeek Corp. and Lycos, Inc. help users access information from the Internet. As the volume of information available on organizations' computer systems has increased and the use of data communications has grown as a preferred means of day-to-day communications, organizations increasingly seek a number of geographically dispersed access points to their own networks and to the networks of other organizations. In the commercial sector, the number of interconnections that businesses desire to establish with networks, customers, suppliers and affiliates generally has made the development of proprietary access systems on a case-by-case basis costly and time consuming. As a result, many organizations seek reliable, high-speed and cost-effective means of internetworking and increasingly rely on the Internet. As reliance on the Internet for the transmission of data, applications and electronic commerce continues to grow among organizations, the Company believes that these organizations will require fast, reliable, geographically dispersed and competitively priced Internet access and services. Internet Telephony The Internet telephony industry began in 1995, when experienced Internet users began to transfer voice messages from one personal computer to another. In 1995, VocalTec Communications, Ltd. ("VocalTec") introduced software that allowed personal computer users to place international calls via the Internet to other personal computer users for the price of a local call. In its early months, the growth of Internet telephony was constrained due to the poor sound quality of the calls and because calls were mainly limited to those placed from one personal computer to another. The poor sound quality of Internet telephony was due to the fact that the Internet was not created to provide for simultaneous voice traffic. Unlike conventional voice communication circuits, in which the entire circuit is reserved for a call, Internet telephony uses packet switching technology, in which voice data is divided into discrete packets that are transmitted over the Internet. These packets must travel through several routers in order to reach their destination, which may cause misrouting, and delays in transmission and reception. The limited capacity of the Internet has also restrained the growth rate of Internet telephony. 8 However, as the industry has grown, substantial improvements have been made. New software algorithms have substantially reduced delays. The use of private networks or intranets to transmit calls as an alternative to the public Internet has alleviated capacity problems. Another key development has been the introduction of gateway servers, which connect packet-switched data networks such as the Internet to circuit-switched public telephone networks. Developments in hardware, software and networks are expected to continue to improve the quality and viability of Internet telephony. In time, packet- switched networks may become substantially less expensive to operate than circuit-switched networks, because carriers can compress voice traffic and place more calls on a single line. Internet telephony has emerged as a low cost alternative to traditional long distance calls. IDC projects that the Internet telephony market will grow rapidly to over $23.4 billion in 2003, from approximately $1.1 billion in 1998 and that Internet telephony will account for nearly 11% of domestic and international long distance voice traffic by 2002. Internet telephone calls are less expensive than traditional international long distance calls primarily because these calls are carried over the Internet or a proprietary network and therefore bypass a significant portion of international long distance tariffs. The technology by which Internet phone calls are made is also more cost-effective than the technology by which traditional long distance calls are made. IDC projects that commerce over the Internet will grow to approximately $1.3 trillion in 2003. Market Opportunity The market for international voice and data telecommunications is undergoing fundamental change and has experienced significant growth as a result of: (i) deregulation and privatization of telecommunications markets worldwide; (ii) the convergence of traditional voice and packet switching technology; and (iii) the growth of the Internet as a communications medium, including Internet telephony. Deregulation and Privatization of Telecommunications Markets Worldwide. Significant legislation and agreements have been adopted since the beginning of 1996 which are expected to lead to increased liberalization of the majority of the world's telecommunication markets, including: . the U.S. Telecommunications Act, signed in February 1996, which establishes parameters for the implementation of full competition in the U.S. domestic local and long distance markets; . the European Union's Services Directive, adopted in 1990, which abolishes exclusive rights for the provision of voice telephony services throughout the European Union and the public switched telephone networks of any member country of the European Union by January 1, 1998, subject to extension by certain European Union member countries; and . the WTO Agreement, signed in February 1997, which creates a framework under which 69 countries have committed to liberalize their telecommunications laws in order to permit increased competition and, in most cases, foreign ownership in their telecommunications markets, beginning in 1998. The Company believes that these initiatives, as well as other proposed legislation and agreements, will provide increased opportunities for emerging competitive carriers such as IDT to provide telecommunications services in targeted markets. Deregulation has encouraged competition, which in turn has prompted carriers to offer a wider selection of services and reduce prices. The industry's projections for substantially increased international minutes of use and revenue over both the near term and long term are based in part on the belief that reduced pricing as a result of deregulation and competition will result in a substantial increase in the demand for telecommunications services in most markets. Convergence of Traditional Voice and Packet Switching Technology. Technological advancements have allowed the use of "packet switching" technology for the transmission of voice telecommunications traffic, enabling a substantial increase in network efficiency, as well as the use of the Internet for voice communications. 9 Traditional international long distance calls use a technology called "circuit switching," which carries the calls over international voice telephone networks. Circuit switching requires a dedicated connection between the caller and the recipient which must stay open for the duration of the call. On the other hand, packet switching technology breaks voice and fax calls into separate data packets, sends them over the Internet, then reassembles them in their original form for delivery to the recipient. This technology allows data packets representing multiple conversations to be carried over the same line, and is therefore inherently more efficient than is circuit switching technology. In addition, the use of the Internet as a voice communications medium provides significant reductions in the cost of transmitting traffic, while bypassing the cumbersome and expensive settlement process inherent in international voice communications. The development of voice applications for the Internet is part of a larger trend of convergence of standard voice and data networks. Internet telephony services are expected to be one of the fastest growth segments in the telecommunications industry. The IDT Approach IDT's background as a leading alternative provider of wholesale and retail international telecommunications services, combined with its experience as a domestic Internet service provider and its leadership role in the field of Internet telephony, position it to capitalize on continuing deregulation in the international telecommunications marketplace and the convergence of voice and data telecommunications technologies. The Company leverages its customer base, existing carrier relationships and technology platforms to (i) develop new, low-cost termination arrangements; (ii) offer new services such as prepaid calling cards and Internet telephony to wholesale and retail customers in target countries; and (iii) negotiate partnership arrangements with existing and emerging carriers to market the Company's Internet telephony services. Strategy The Company's objective is to enhance its current position as as a leading facilities-based provider of high-quality, low-cost telecommunications services to wholesale and retail customers in both the U.S. and abroad. Key elements of the Company's strategy include: Focus on International Telecommunications. The Company believes that the international long distance market provides attractive opportunities due to its higher revenue and gross profit per minute, and higher projected growth rate compared to the domestic long distance market. The Company targets international markets with high volumes of traffic, relatively high per-minute rates and favorable prospects for deregulation and privatization. The Company believes that the ongoing trend toward deregulation and privatization will create new opportunities for the Company to increase its revenues and to reduce its termination costs, while maintaining balanced growth in wholesale and retail traffic. Expand Switching and Transmission Facilities. The Company is continuing to expand and enhance its network facilities by investing in switching and transmission facilities where traffic volumes justify such investments. During Fiscal 2000, the Company intends to invest in (i) undersea cables connecting the U.S. and Europe, the U.S. and Asia, and points within Europe; (ii) facilities in the U.S., the U.K., France, Italy, Spain, Germany, Austria and other European countries; and (iii) additional network compression equipment. The Company believes that these investments will allow it to reduce the cost of its services and to enhance its offerings, while maintaining its high service quality. Expand Service Offerings and Marketing Activities. The Company will continue to develop value-added services and to market them on a wholesale and retail basis in order to increase margins, optimize network utilization and improve customer loyalty. IDT has historically used technology to capitalize on regulatory opportunities and market niches by offering innovative value-added services such as call reorigination, international prepaid calling cards and Internet telephony. In addition, the Company intends to capitalize on its strategic alliances and other relationships with U.S. and foreign companies in order to expand its customer base. 10 Pursue Strategic Alliances and International Agreements. The Company has capitalized on its significant traffic volume and technological expertise to negotiate favorable termination agreements with international carriers. The Company intends to continue to seek new termination relationships with established and emerging carriers to reduce its termination costs for traditional international voice telephony, and in some cases to use its relationship with Net2Phone for additional low cost termination. To date, the Company has entered into approximately 65 agreements with carriers that provide for the favorably priced termination of its calls in over 40 countries. Maintain Low Operating Costs and Improve Profitability. The Company seeks to continue to improve its profitability by (i) maintaining a streamlined general and administrative staff; (ii) leveraging its general and administrative staff across its complementary telecommunications services businesses; (iii) capitalizing on its wholesale traffic volumes to arrange cost-effective resale and termination arrangements, while continuing to increase its sales of higher margin retail international minutes; and (iv) investing in network infrastructure and selling, general and administration expenses when such investment is justified by traffic volumes. Services IDT provides its customers with integrated and competitively priced international and domestic telecommunications, Internet access and through its majority-owned Net2Phone subsidiary, Internet telephony services. Telecommunications Services The Company's four primary telecommunications services are: (i) wholesale carrier services; (ii) prepaid calling cards; (iii) international retail services for individuals and businesses; and (iv) domestic long distance services in the U.S. The Company generated revenues from its telecommunications business of approximately $684.6 million during Fiscal 1999, up from $303.9 million during Fiscal 1998. Telecommunications revenues represented 93.5% and 90.6%, respectively, of IDT's total consolidated revenues in Fiscal 1999 and Fiscal 1998. Wholesale Carrier Services The Company sells its wholesale carrier services to other U.S. and international carriers, utilizing flexible and least-cost traffic routing and based on its expertise in navigating the complex accounting rate system. In this way, the Company acts as a "carrier's carrier," providing the numerous entrants in the retail market with rates that are much lower than those previously offered by the more established carriers. The Company is able to offer competitive rates to its carrier customers as a result of (i) its extensive relationships in the long distance telecommunications industry; (ii) its ability to generate a high volume of long distance call traffic; and (iii) the advantageous rates negotiated with foreign PTTs and competitive carriers. During Fiscal 1999, wholesale carrier sales represented 39.5% of IDT's total consolidated revenues. Prepaid Calling Cards The Company sells prepaid debit and rechargeable calling cards providing access to more than 230 countries and territories. The Company's rates are between 10% and 50% less than the rates for international calls that are charged by the major facilities-based carriers. The Company's debit cards are marketed primarily to ethnic communities in the U.S. that generate high levels of international traffic to specific countries where the Company has favorable termination agreements. Recent immigrants and members of the ethnic communities are heavy users of international long distance, given their desire to keep in touch with family members and friends back home. The Company also markets cards in the U.K., France and the Netherlands, seeking to capitalize on the opportunity presented by the recent surge in immigration from under- developed countries to Europe's developed nations. During Fiscal 1999, sales of prepaid calling cards accounted for 49.7% of IDT's total consolidated revenues. 11 The Company offers both IDT-branded and non- IDT-branded prepaid calling cards, with favorable rates to specific areas of the world. The cards are sold in several different dollar denominations, most commonly $5, $10 and $20. The table below lists the IDT phone cards sold by the Company: California Exclusive Illinois Exclusive New York Exclusive Carolina Exclusive Long Island Exclusive Nosso Brazil Card Centro Americard M&M Card Pepe Colombianita China Card Mass Exclusive Pepe Megatel Colombiana Card Mega Mexico Card Puerto Rico Exclusive Colombianita Card Megatel Card Rhode Island Exclusive Connecticut Exclusive Megatel Vending Texas Exclusive Discovery Card Metropolis Card Vending Georgia Dominicall Card Merengue Card Exclusive Florida Exclusive New Jersey Exclusive Vending Washington Georgia Exclusive New York Alliance Exclusive Washington Alliance Washington Exclusive The Company's rechargeable cards, distributed primarily through in-flight magazines, permit users to place calls from 43 countries through international toll-free services. The Company's retail customers can use its calling cards at a touch tone telephone by dialing an access number, followed by a personal identification number (a "PIN") assigned to each prepaid calling card and the telephone number the customer seeks to reach. The Company's switch completes the call, and its debit card platform reduces the outstanding balance of the card during the call. The Company offers prepaid calling cards that can be used to access the Company's network by dialing a toll-free number or, in specific metropolitan markets, local area calling cards that only require a local call. The Company believes that many of its customers typically use its calling cards as their primary means of making long distance calls due to (i) attractive rates, (ii) reliable service, (iii) the ease of monitoring and budgeting their long distance spending and (iv) the appealing variety of calling cards offered by the Company to different market segments. IDT expanded its domestic debit card platform through its acquisition of InterExchange and its subsidiaries (collectively, "InterExchange"), completed in May 1998. Through InterExchange, the Company operates one of the nation's largest international debit card platforms. The platform provides the Company with a broad range of services used to conduct its calling card operations, including billing, routing of calls, and determining the amount of credit available on each outstanding calling card. As part of IDT's rapid expansion in the prepaid calling card market, the Company has initiated marketing private label phone cards. Private label cards serve as lucrative promotional items and can also be used to help generate brand name awareness. In December 1998, IDT signed an exclusive multi-year supply and distribution agreement with M&M/MARS's "M&M's(R)" Chocolate Candies, one of the largest confectionary brands in the world, to provide specifically-branded, private label phone cards. Through a strategic marketing relationship, "M&M's(R)" cards will be available to retailers currently carrying "M&M's(R)" Chocolate Candies. The phone cards feature the likenesses and the voices of the "M&M's(R)" Brand Characters currently featured in "M&M's(R)" advertising. IDT handles the entire call process of these phone cards, including call routing, authorization, prepaid platform and billing of the "M&M's(R)" cards. In February 1999, the Company launched Debitalk, its first prepaid callback phone card, which allows people around the world to bypass the high costs of placing international calls from countries outside of the United States. Debitalk allows users to place phone calls from anywhere in the world using a touch-tone telephone with a pre-programmed callback number. Users dial their access number, allow the phone to ring once, hang up, wait for the ring back, listen to their real-time account balance, and dial their destination number. There are no credit cards, invoices or bad debt associated with Debitalk as the callback services are prepaid. 12 International Retail Services The Company offers international retail services to customers outside of the U.S., primarily through call reorigination. The Company also provides its call reorigination customers with access to enhanced U.S. telecommunications service options at U.S. long distance rates. These options include: voicemail, itemized billing, speed dial codes that allow customers convenient access to the call reorigination service, personalized voice prompts that allow customers to be called back at extensions where the party being dialed must be requested by name, remote programmable service that allows customers the flexibility of selecting the number called back instead of receiving the call at a preprogrammed number, access to U.S. toll-free 888 and 800 numbers, and simplified billing that combines the cost of the call back to the customer and the cost of the customer's outbound call from the U.S. in one bill for convenient and orderly presentation. The Company markets its call reorigination service to businesses and individuals. International retail services accounted for 2.9% of IDT's total consolidated revenues in Fiscal 1999. As an alternative service, the Company provides international long distance services to certain overseas customers, currently in the United Kingdom, via standard international direct-dial network services. Through this service, the Company offers a foreign customer the ability to place a direct call to an international destination over the Company's leased network at competitive rates without the need for call reorigination. In markets that are deregulating, the Company's strategy is to migrate its call reorigination customers to international direct-dial service, where operating environments warrant. The Company expects to offer retail service in several European nations by the end of Fiscal 2000. Domestic Long Distance Services The Company markets certain long distance services directly to retail customers in the U.S. The Company's customers pay rates that are between 10% and 50% less than the rates for domestic long distance service charged by the major facilities-based carriers. The Company also markets the long distance service as a value-added bundled service with its dial-up Internet access, and offers customers who maintain minimum monthly long distance billing levels rates that are approximately 20% less than the rates for dial-up Internet access that are charged by the major national Internet service providers. Domestic long distance services accounted for 1.4% of the Company's total consolidated revenues in Fiscal 1999. In September 1999, the Company announced a new domestic long distance plan featuring a flat rate of 5 cents per minute with a $3.95 monthly fee. The 5 cents per minute rate applies to all calls, 24 hours a day, 7 days a week. IDT also plans to offer rates as low as 3.5 cents per minute for customers who also subscribe to IDT's dial-up Internet service. The Company believes that it is now the lowest cost domestic long distance provider in the country. Internet Services In 1994, the Company began offering dial-up and dedicated Internet access to individuals as a value-added service for its domestic long distance customers, and to businesses as a stand-alone service. IDT's Internet access network, which consists of multiple leased lines, offers 33 (POPs) owned by the Company, and approximately 375 POPs owned by local and regional Internet service providers, through which subscribers may access the Internet. The Company's three primary Internet access and online services are: (i) dial-up Internet access for individuals and businesses; (ii) direct-connect dedicated Internet services for corporate customers; and (iii) the Genie online entertainment and information services. Internet access accounted for 2.3% of IDT's total consolidated revenues in Fiscal 1999. Dial-Up Access Services The Company's dial-up service offers individuals unrestricted Internet access with an easy-to-use point-and-click graphical user interface for a fixed monthly fee. IDT provides its customers with access to a full range of Internet applications, including e-mail functions, Web sites, Usenet news groups, databases and public domain software, as well as a full graphics package and browser software. 13 The Company provides its individual customers with several pricing options. Currently, the Company offers Basic Internet Service for $19.95 per month and Premium Service for $29.95 per month. Each is a fully graphical account bundled with an Internet browser, unlimited dial-up Internet access, and an e- mail account. Premium Service customers are entitled to the Reuters news service, a second e-mail address, eight megabytes of personal Web space storage, and special customer support services. The Company also offers Basic Internet Service access accounts for $15.95 per month for customers who sign up for IDT's long distance telephone service and maintain their monthly long distance telephone billings at or above $40 per month. The Company offers free Basic Internet Service accounts for those customers who sign up for IDT's long distance telephone service and maintain their monthly telephone billings at or above $150 per month. In addition, the Company offers an e-mail only account for $7.95 per month. The Company has entered into an agreement with Mail Call, Inc., pursuant to which the Company's Internet subscribers are able to retrieve e-mail via telephone, using text-to-speech technology. This service, which is called "Mail Call," enables subscribers to hear their e-mail messages by calling a toll-free telephone number, without the need for a computer. Subscribers to this service can choose to listen to the text of each message (in English or Spanish), have a "hardcopy" of the message sent to any fax machine in North America, or reply to the message using one of several features. Mail Call also offers several preference options, including six different voices with three pitches each, a default fax phone number, a customized response, and several pattern matching strings which can be used to filter and prioritize incoming e-mail messages. In August 1999, the Company teamed up with iPass, to offer to its retail and business customers roaming Internet access in over 150 countries using iPass' vast worldwide network of 4,000 POPs. Internet roaming is available immediately to the Company's customers, who can download the iPass connection software at the Company's Web site. Instead of having to pay for long-distance calls to connect back to IDT's service while outside the United States, the Company's customers can now access the Internet locally in virtually every major city throughout the world. The roaming Internet service also improves the connection quality for users who often experience noisy or dropped connections with Internet connections via international calls. Direct Connect Dedicated Services The Company offers a variety of Internet access options and applications specifically designed to address the unique needs of medium to large-sized businesses. These corporate clients typically require high-speed dedicated circuits because they desire to put up a Web site, the nature of their business requires the transfer of large data files, or it would be impractical for them to maintain dial-up accounts for all of their employees who require Internet access. In March 1999, the Company formed a Dedicated Internet Group for the primary purpose of selling Dedicated Internet Access, Digital Subscriber Lines ("DSL"), Web Hosting and Design and Colocation to business clients. The Dedicated Internet Group is currently staffed by 20 employees and revenues have increased from $4,000 in new sales in April 1999 to over $100,000 in September 1999. The Company currently charges clients using 56 kilobits per second ("56K") lines approximately $350 per month for direct connect service and clients utilizing full T1's approximately $1,400 per month for direct connect service. For clients with higher bandwith needs, IDT offers a tiered T3 service starting at $3,000 per month. In June 1999, IDT began offering Internet access through DSL. DSL uses standard telephone lines to provide access to the Internet at speeds many times faster than standard 56K modem connections, at a lower cost than a dedicated leased line. IDT offers DSL service to its customers at monthly rates ranging from $125 to $499, depending on line speed and the length of the contract, with four months of free Internet access included in the package. The Company views the DSL market as largely untapped given the 38,000 to 40,000 nationally installed DSL lines and the potential market of well over five million DSL subscribers. 14 Genie Services The Company also offers the Genie online service, giving subscribers access to roundtables, bulletin boards and chat areas, individual and multiplayer games, news, travel, entertainment, weather and other information services. Currently, the Company markets the Genie content as an online service available only to subscribers. The Company offers Internet access to Genie online subscribers for an additional fee. Telefonica Agreement In October 1999, IDT entered into a joint venture agreement with Terra Networks, S.A. (formerly known as Telefonica Interactiva, S.A.) pursuant to which the parties formed two limited liability companies to provide Internet services and products for customers in the United States, mainly targeting and focusing on the Hispanic population in the United States. One company was formed to provide Internet access to customers in the target market, and IDT contributed its dial-up Internet access customers, its managerial resources and facilities and its portfolio of current and future products for Internet access to the new company in exchange for a 49% ownership interest. The other company was formed to develop and manage an Internet portal that will provide content-based Internet services, electronic commerce offerings and other Internet services to customers in the target market. IDT will assist in developing relationships with content producers and content providers and will sell advertising on this new company's portal in exchange for a 10% ownership interest. Terra Networks has agreed to fund the first $30 million of expenses for the ISP joint venture, subject to the completion of certain performance criteria. IDT/Westmintech Joint Venture In September 1999, Chattle, Inc., a wholly owned subsidiary of IDT, entered into a joint venture with Westmintech Company, L.L.C. ("Westmintech") in the form of a Delaware limited liability company named Worldwide Intercom, L.L.C. ("Worldwide Intercom") to provide high speed voice and data services, including without limitation local and long distance telephone service (dedicated and 1+), cable television service (cable and/or fiber optic), on line service with direct Internet access and Internet access services (DSL, dedicated and dial up) and various other Internet services and other technology related to the foregoing existing and yet to be developed, to the tenants of commercial and residential properties worldwide. Westmintech is owned in part and controlled by Charles Kushner or an entity which he controls. Mr. Kushner owns in part and controls directly or indirectly various multifamily, retail and commercial properties throughout New York and New Jersey. Chattle, Inc. owns 75% of Worldwide Intercom and Westmintech owns the remaining 25%. Under the terms of the joint venture agreement, IDT will license to Worldwide Intercom intellectual property, technical know-how, and patent, copyright and trademark rights relating to the provision of Worldwide Intercom's services. IDT will also provide Worldwide Intercom with back office support for its services, and will arrange for the installation, activation, maintenance, repair and service of the hardware and wiring necessary to provide Worldwide Intercom's services. The initial term of the agreement is for a period of one year and shall be automatically renewable for additional one year periods. Net2Dine.com In August 1999, the Company launched Net2Dine.com, an Internet directory designed for restaurant owners and consumers which currently lists over 112,000 restaurants in the United States. Net2Dine.com attracts restaurants to its Web site by offering a free restaurant listing as well as value-added products that increase a restaurant's presence on the Internet. For $10 a month, a restaurant may subscribe to Net2Dine.com's Webpage Plan. Every subscribing restaurant receives its own mini Webpage which is built into Net2Dine.com's Web site, complete with Click2Reserve on-line reservations. Each Webpage provides detailed information about the restaurant, including its credit card policy, specials, reservations requirements and other relevant information. The Company intends to pursue and/or develop other opportunities in the Internet business, with a focus on identifying and exploiting niche market opportunities, specifically in markets where the Company can leverage one or more of its existing strengths. 15 Internet Telephony In August 1996, the Company began offering Net2Phone, the first commercial telephone service to bridge calls between multimedia PCs and telephones via the Internet, and to charge for this service on a per-minute basis. Upon installation of the Net2Phone software, which is provided by Net2Phone primarily through the Internet without charge, a Net2Phone user receives an account number, and chooses a personal identification number as an added security feature. Once the Net2Phone software is installed, a user may place toll-free "800" or "888" calls from anywhere in the world without incurring any charges for such calls. Upon a user's prepayment for Net2Phone minutes, the user may begin using Net2Phone to place telephone calls worldwide. In Fiscal 1999, Net2Phone received the following awards and commendations: . Net2Phone Direct was named Internet Telephony Magazine's 1998 Product of the Year . Net2Phone was named CTI Magazine's 1998 Product of the Year A user places a Net2Phone call after establishing a connection to the Internet. The call is routed over the Internet, at no charge to the customer, to the Company's telecommunications switches in the U.S. The call is then routed in the same manner as other voice telephony calls, using the Company's least-cost routing platform in order to increase the savings realized by international callers. Net2Phone's voice quality has been enhanced through the use of technology licensed from Lucent Technologies, Inc., and the software relating to Net2Phone is available in seven different languages. For calls originating overseas, the cost of placing and terminating the call with Net2Phone is up to 95% below the rates generally charged by traditional foreign carriers to place and terminate standard international telephone calls. In October 1997, the Company introduced Net2Phone Direct, a commercial telephone service that enables international and domestic phone-to-phone calls to be made via the Internet using packet switching technology. Net2Phone Direct enables phone-to-phone calling between two parties using telephones, while using the Internet to transport the long-haul components of the call. Users of Net2Phone Direct are able to call a local or toll-free access number, which connects the call to the Internet. Through such use of the Internet, the Company expects to significantly reduce the cost of international and domestic calling by extending the benefits of placing Internet telephone calls to customers with access to a regular telephone without requiring the use of PCs or individual Internet access. The Company also intends to develop a global network of switches and servers, thereby expanding the Company's ability to provide competitively priced Internet telephony solutions. The Company generated net revenues from its Internet telephony business of about $30.7 million during Fiscal 1999. IDT has entered into agreements with resellers in several foreign countries, pursuant to which such parties purchase and house the Net2Phone Direct servers in their country and resell Net2Phone Direct pin numbers to end-users. IDT provides customer service and technical support for Net2Phone and Net2Phone Direct customers in seven languages on a 24 hour per day, 7 day per week basis. Sales, Marketing and Distribution Telecommunications The Company primarily markets its international telecommunications services through its direct wholesale carrier services sales staff. The staff primarily relies on, and benefits from, (i) the Company's extensive relationships and increasing international exposure and recognition throughout the long distance industry for marketing its carrier services; (ii) the Company's substantial traffic volumes, which enable the Company to negotiate for lower rates; and (iii) favorable terminating rates negotiated with PTTs and foreign carriers. The Company primarily markets its international call reorigination services through its overseas network of independent sales representatives. The foreign sales representatives, who are supervised by the Company's U.S.-based sales managers, provide the Company with access to local business and residential customers and new opportunities in the local markets they serve. The Company pays its foreign sales representatives on a 16 commission basis. As of October 1999, the Company was represented by over 300 foreign sales representatives worldwide. The Company also has commenced direct sales efforts, primarily through overseas advertising in international print media to penetrate particular market segments that it does not currently serve. The Company currently markets its prepaid debit cards to retail outlets throughout the U.S. though Union Telecard Alliance, LLC ("Union"), a joint venture company of which the Company owns 51% of the outstanding equity interests. Union is one of the largest distributors of prepaid calling cards in the nation, selling through over 100,000 retail outlets throughout the United States. In July 1999, the Company entered into an agreement with All Americas Cable & Radio ("AACR"), a long distance carrier based in the Dominican Republic, in which the Company will distribute prepaid calling cards in the Dominican Republic on behalf of AACR. As part of its plan to expand its territory beyond the U.S., the Company has begun to establish a distribution network in the Dominican Republic to replicate its calling card distribution network in the United States. Union also plans to begin distributing prepaid cards in Puerto Rico and parts of Central America. Union has entered into agreements with sub-distributors, located in Chicago, Florida, New York, Ohio and Texas, whereby the sub-distributors have agreed to market the prepaid calling cards of the Company in exchange for preferential pricing, exclusive cards, extensions of credit, incentive bonuses and technical support from the Company which is intended to assist each respective sub-distributor in the growth and development of its business. The exclusive calling cards of the Company will be marketed by the corresponding partnership in a given state. In addition to selling IDT's prepaid calling cards, Union sells prepaid calling cards of other companies. This allows Union to operate as a "one-stop shop" for the widest possible range of prepaid phone cards, enabling Union to enhance its sales to the retail outlets it currently serves. IDT also sells rechargeable calling cards, which are distributed primarily through in-flight magazines. Internet Access The Company established itself as a leading national provider of Internet access services primarily through extensive broadcast and print advertising to the consumer market. In Fiscal 1997, the Company refocused the marketing efforts of its Internet access operations in order to lower the cost of acquiring new customers. While the Company intends to continue various means of broadcast advertising in select markets, the Company's sales and marketing efforts now are focused primarily on increasing its Internet customer base through (i) OEM transactions, including hardware, software and operating system bundling, (ii) retail channel distribution agreements and (iii) bundling Internet access with long distance telephone service. Additionally, the Company has entered into agreements with other Internet service providers to resell IDT's Internet access services. Through these strategies, the Company believes that it will increase its exposure to the millions of computer users who are potential customers of the Company's Internet access services, while reducing its customer acquisition costs as compared to traditional broadcast and print advertising. As of October 20, 1999, the Internet sales force consisted of approximately 45 employees. The Company's Internet sales staff is closely supervised and undergoes customized and ongoing training to ensure a high level of knowledge and service. Internet Telephony Net2Phone markets its Internet telephony services primarily by distributing its products without charge via the Internet and acquiring commercial Net2Phone customers through its prepaid platform. Net2Phone promotes its service through online and Internet-based advertising venues, traditional print advertising in international publications, and electronic media. In addition, Net2Phone has agreements to bundle the required software for Net2Phone, as a value-added component, with the software of other companies, and with other PC and computer equipment. Such bundling agreements have included bundling Net2Phone with a telephone handset product called Internet PhoneJACK(R) developed by Quicknet Technologies, Inc.; this combination is marketed under the name Net2Phone Pro. Net2Phone has entered into strategic marketing and distribution relationships with leading 17 Internet companies, including Yahoo!, Infospace.com, Snap.com, Excite@Home and ZD Net. Net2Phone has also entered into arrangements with leading computer equipment and software companies, such as IBM, Compaq and Packard Bell-NEC Europe to include its software with these companies' products. Net2Phone has agreements with resellers in certain countries, pursuant to which such resellers purchase bulk amounts of Net2Phone minutes in advance, and resell such minutes to users in their own countries as representative sellers of Net2Phone. Net2Phone currently offers Net2Phone Direct in over 62 cities in the U.S., and has entered into agreements with Daewoo and Naray in South Korea and Marubeni in Japan to market Net2Phone Direct in those countries. Net2Phone also seeks to sell Net2Phone Direct switch servers to additional third parties in strategic markets worldwide, and to enter into agreements to resell the Click2CallMe service. In April 1998, Net2Phone began offering its Click2Talk Service, in which an icon is placed on a customer's Web site. When an end-user of the Web site that is equipped with an appropriately configured multimedia PC clicks on the Click2Talk icon, the Net2Phone technology directly dials the customer's toll- free customer service number. In August 1998, the Company began offering the Click2CallMe service, in which an icon is placed on a customer's Web site. When an end-user of the Web site clicks on the Click2CallMe icon, IDT's callback and Net2Phone technologies notify the customer, and then dials the end-user in order to connect the customer and the end-user. In February 1999, Net2Phone launched easysurf.com (www.ezsurf.com) the first web shopping portal powered by Internet telephony. Easysurf.com allows visitors to learn about online merchants' services and to communicate with them through direct voice interaction. Easysurf.com gives users added convenience by listing useful information for key online retailers, including payment and shipping options and return policies. Easysurf.com enables voice communications with over 300 Web sites, and educates users by providing them with essential information needed to buy products online. In July 1999, Net2Phone entered into an exclusive, four-year distribution and marketing agreement with ICQ, a subsidiary of America Online, to provide Internet telephony services to users of ICQ's instant messaging service. ICQ will embed Net2Phone's Internet telephony software into ICQ's Instant Messenger software on an exclusive basis, allowing ICQ users to make PC-to- phone and PC-to-PC calls and to receive phone-to-PC calls. International Sales In Fiscal 1997, 1998 and 1999, international customers accounted for approximately 25%, 11% and 13% of the Company's total revenues, respectively. See Note 9 to the Company's Consolidated Financial Statements. The Company anticipates that revenues from international customers will continue to account for a significant percentage of its total revenues. Bundling of Service Offerings The Company bundles its Internet access services with its domestic long distance telephone services. By bundling its long distance phone service with its $15.95 per month discounted dial-up Internet access, the Company is currently able to compete with many major national providers of Internet access by offering rates that are on average 20% lower. By bundling its Internet access services with its rechargeable calling cards, the Internet access rates can be as much as 45% lower. At the same time, the Company differentiates itself from its competitors in the Internet access market who are unable to offer their customers significant savings on their monthly long distance bills. Additionally, the Company is able to leverage its existing Internet sales force for the sale of its bundled long distance and Internet access service. Customers Telecommunications As of October 1, 1999, the Company had approximately 125 wholesale customers located in the U.S. and Europe. The Company supplements this wholesale customer base by offering retail long distance services to individuals and business customers in the U.S. and worldwide, including over 50,000 call reorigination customers. The Company sold over 50,000,000 prepaid calling cards during Fiscal 1999. 18 Internet Access As of October 20, 1999, the Company offered local dial-up access to approximately 65,000 retail customers, provided dedicated access to nearly 500 medium and large-sized businesses, and offered Web hosting services to almost 2,000 customers. Internet Telephony As of July 31, 1999, Net2Phone served over 325,000 active customers who made an average of approximately 60 minutes of calls per month, and handled over 20 million minutes of use per month. Approximately 69% of Net2Phone's customers as of July 31, 1999, were based outside of the United States. As of October 10, 1999, Net2Phone had installed the Click2Talk service on approximately 176 commercial Web sites. Billing and Customer Support IDT believes that reliable, sophisticated and flexible billing and information systems are essential to its ability to remain competitive in the global telecommunications market. Accordingly, the Company has invested substantial resources to develop and implement its proprietary management information systems. The Company's billing system enables the Company to (i) accurately analyze its network traffic, revenues and margins by customer and by route on an intra-day basis; (ii) validate carrier settlements; and (iii) monitor least cost routing of customer traffic. The entire process is fully automated and increases efficiencies by reducing the need for monitoring by the Company's employees. The Company believes that the accuracy and efficiency of its management information systems provide it with a significant strategic advantage over other emerging carriers. The Company's majority-owned Net2Phone subsidiary has also developed a sophisticated real-time management information system for its Internet telephony services. This system allows Net2Phone to monitor the length and quality of the calls that are placed over its Net2Phone and Net2Phone Direct systems, thereby helping to ensure a high level of service and more efficient routing of calls. In addition, this system helps Net2Phone prevent fraud, and assists in the customer management process by automatically informing customers of new information, including system upgrades. The Company believes that its ability to provide adequate customer support services is a crucial component of its ability to retain customers. The Company has successfully focused on improving such service through a number of measures, including the addition of support personnel and the monitoring of customer waiting time. The customer support staff provides 24-hour technical assistance in addition to general service assistance. Customer support personnel communicate with subscribers via telephone, e-mail and fax. The Company requires that each customer support staff member field a minimum number of calls and e-mails each day. The Company also employs liaisons between the customer support and technical staffs to ensure maximum responsiveness to changing customer demands. Network Infrastructure The Company maintains an international telecommunications switching infrastructure and U.S. domestic network, consisting of owned and leased lines that enable it to provide an array of telecommunications, Internet access and Internet telephony services to its customers worldwide. IDT believes it enjoys competitive advantages by utilizing this network to carry both voice and Internet traffic, resulting in the optimization of both its network utilization and associated capital. IDT's network is monitored 24 hours a day, seven days a week, and 365 days a year by its network operations center. The entire network is centrally managed from IDT's control center through the use of a standardized communications protocol. In addition, two proprietary monitoring systems are used to manage modem pools. 19 Telecommunications Network Private Line Network The Company operates a growing telephone network consisting of resold international switched services, U.S. domestic dedicated leased fiber optic lines, and Company-owned switch equipment in the U.S. which are interconnected to major PTTs, emerging carriers and domestic interexchange carriers, local exchange carriers and competitive local exchange carriers. IDT's major switching facilities are located in Piscataway, N.J., Westfield, N.J., Newark, N.J., New York, N.Y. and London, England. These varied locations serve to provide the network with redundancy and diversity. All of these locations are linked with the dominant local exchange carrier as well as at least one of the competitive local exchange carriers, allowing the Company to interconnect with all major interexchange carriers to switch traffic via the Company's leased private-line DS3 network. Furthermore, all of the Company's locations are interconnected via leased lines to enhance network reliability and redundancy as each location interconnects with the various carriers. In September 1998, the Company entered into a $32 million, 20 year IRU agreement with Frontier Communications of the West, Inc. ("Frontier") to obtain dedicated DS-1, DS-3, OC-3 and OC-12 circuit capacity in the U.S. over Frontier's network, connecting more than 120 metropolitan areas around the nation. These network facilities will enable the Company to expand the range and reliability of its data and voice transmission service, while reducing network costs. IDT will be able to offer nationwide dial-up long distance and dial-around (10xxx) services, reduce 800-origination costs and provide for origination and termination of carrier traffic in all major U.S. cities. In October 1999, the Company entered into an agreement with Frontier whereby IDT will enhance its ability to provide presubscribed long distance (1+) and dedicated and toll-free services throughout the United States as well as casual calling (10xxx) in selected areas of the country. The additional capacity will significantly enhance IDT's ability to provide long distance dial up services. In addition, the Company owns and leases switched services to connect its U.S. and U.K. facilities. These services are used to originate traffic from IDT's customer base in the U.K. and to terminate existing carrier and call reorigination traffic to the U.K. The Company has about 65 operating and terminating agreements that provide for the termination of traffic in over 40 countries, including agreements with companies based in Spain, the Dominican Republic, Italy, Bangladesh, Cyprus and Chile. The Company also plans to obtain leased lines to these destinations, which will result in reduced costs for termination to these countries. The Company has also targeted countries such as the Netherlands, Germany and France for network expansion due to the large number of minutes the Company presently terminates and the size of the Company's installed base of telecommunications customers in these countries. International Telecommunications Acquisitions & Agreements In January 1999, the Company signed agreements with France Telecom, Deutsche Telkom, Swisscom N.A. and Telefonica de Espana, four major telecommunications companies based in Europe, to establish a direct fiber-optic connection between the companies for international long distance service. The agreement establishes direct channels between the companies' international switching points and the Company's facilities in the United States and United Kingdom. The Company has already established a presence in the United Kingdom with its facilities-based switch, and has purchased more than 12,000 kilometers of undersea cable connecting the United States, Canada and the United Kingdom. In February 1999, the Company acquired Orion Telekom BV, a Netherlands based provider of telecommunications services. Through this acquisition, the Company procured a contractual relationship with Royal KPN NV ("KPN") the leading phone company in the Netherlands, and associated physical interconnections, an installed Alcatel S12 switch, an operating license in Holland and a facility in Rotterdam. The Company's voice licensing in the Netherlands coupled with the interconnection available through KPN has enabled the Company to offer wholesale and retail carrier services in the Dutch market. 20 Switching Platforms The Company utilizes two major switching platforms. The Company uses its Excel LNX switches for its application-based products such as call reorigination, direct dial, call through, prepaid calling cards, and value- added services such as voice prompts, speed dialing, voice mail and conferencing. The Excel LNX is flexible and programmable, and is designed to implement network-based intelligence quickly and efficiently. The Company currently owns 65 Excel LNX switches. The other platform is the Nortel DMS250- 300, which serves as an international gateway and generic carrier switch. The Company currently owns four Nortel switches. The Company plans to upgrade its switching platforms in Los Angeles, Miami and New Jersey during Fiscal 2000. All of the Company's switches are modular, scaleable and equipped to signal in such protocols as ISDN or SS7 so as to be compatible with either domestic or foreign networks. The Company plans to use other technologies, including Nortel ERS switches, which allow for the dynamic allocation of voice and data traffic, to enable the Company's Internet network to be used for the transmission of traditional telephone minutes. If successfully developed, this leveraging of IDT's Internet network could provide considerable cost efficiencies for transporting a substantial portion of the Company's domestic voice traffic. Software The Company's Excel LNX switch incorporates Company-developed software which efficiently performs all the applications the Company requires to provide value-added services, as well as billing and traffic analysis. The software enables the Excel LNX to route all calls via the Company's least-cost routing platform. Least-cost routing is a process by which the Company optimizes the routing of calls over the least-cost route on its switch for over 230 countries. In the event that traffic cannot be handled over the least-cost route due to capacity or network limitations, the least-cost routing system is designed to transmit the traffic over the next least-cost route. The least- cost routing system analyzes several variables that may affect the cost of a long distance call, including different suppliers, different time zones and multiple choices of terminating carrier in each country. In some instances, instead of routing a call directly between two overseas points, the least-cost routing system may backhaul an overseas carrier's minutes using resold switched services to the Company's U.S.-based switch in order to terminate the traffic in a third country while taking advantage of the Company's competitive U.S.-based international long distance rates. The least-cost routing system is continually reviewed in light of rates available from different suppliers to different countries to determine whether the Company should add new suppliers to its switch to further reduce the cost of routing traffic to a specific country and to maintain redundancy, diversity and quality within the switching network. By utilizing a least-cost routing system, the Company is able to minimize its costs, and offer lower rates to its customers. Internet Network The Company operates a national Internet network comprised of a leased DS3 45 megabits per second backbone of high speed fiber optic lines connecting eight major cities across the U.S., and leased dedicated T1 fiber optic lines connecting smaller cities to the network. The network backbone uses state-of- the-art routing platforms including Cisco Series 7000 routers and Nortel ERS Magellan switches. The DS3 backbone connects traffic at four major Internet "meet" points where the Company maintains switching and routing equipment and has peering arrangements to exchange Internet traffic with over 50 other Internet backbone providers. To minimize the potential detrimental effects of single points of failure, the Company deploys a minimum of two dedicated leased data lines to each backbone node and remotely positions secondary servers for all configuration and authentication hosts. Multiple data segments are used in high traffic areas to minimize packet loss and to reduce the frequency of congestion in the network. Also, major IDT backbone nodes employ routing switches for directing network traffic. To further enhance network performance, the Company employs an "Open Shortest Path First" protocol, which allows data traffic to be routed most efficiently. The Company seeks to retain flexibility and to maximize its opportunities by utilizing a continuously changing mix of routing alternatives. This diversified approach is intended to enable the Company to take advantage of the rapidly evolving Internet market in order to provide low-cost service to its customers. 21 The Company utilizes the local dial-up switching infrastructure of several Alliance Partners across the country to supplement the Company's owned and operated local dial-up infrastructure. The Alliance Partners, which are independently-owned Internet service providers, employ routing and modem equipment which meet the Company's standards for providing dial-up access services. The Company offers the Alliance Partners a monthly fee for each customer account routed through their local access networks. The Company also provides billing, advertising, marketing and customer acquisition services, in exchange for which the Alliance Partners provide local Internet access. The agreements with Alliance Partners generally have one year terms and do not prohibit the Company from constructing its own local installed POP where warranted. The Company entered into an agreement with PSINet Inc. ("PSINet") in 1996 to use PSINet as the primary Alliance Partner for the Company's dial-up Internet access customers in areas where PSINet has POPs and where there are no other Alliance Partners. The Company leases and operates a dedicated T3 connection to the PSINet network in order to maintain control of the Company's provisioning of customers and to provide customers with access to electronic mail and newsfeeds. Through the buildout of its own infrastructure and its agreement to utilize the PSINet network as well the local networks of its Alliance Partners, IDT's network now provides local dial-up Internet access through more than 400 POPs, of which the Company owns 33. Research and Development The Company employs a technical staff that is devoted to the improvement and enhancement of the Company's existing telecommunications and Internet products and services, including switching technologies and the development of new technologies and products. The Company believes that the ability to adjust and improve existing technology and to develop new technologies in response to, and in anticipation of, customers' changing demands is necessary to compete in the rapidly changing telecommunications and Internet industries. There can be no assurance that the Company will be able to successfully develop new technologies or effectively respond to technological changes or new industry standards or developments on a timely basis, if at all. In connection with the Company's acquisition of InterExchange in May 1998, the Company acquired InterExchange's in-process research and development relating to alternative switching and compression technologies. See "Management's Discussion and Analysis of Financial Condition and Results of Operations-- Fiscal 1998 Compared to Fiscal 1997--Acquired Research and Development." To the extent that the Company succeeds in completing the development of such alternative switching technologies, the Company believes that it will be able to substantially reduce its investments in connection with the acquisition and installment of additional switching equipment, and that it will be able to install such equipment in substantially less time. In addition, if the Company succeeds in developing such compression technologies, the Company believes that it will be able to manage voice compression more effectively across its network and provide significant cost efficiencies in routing telephone traffic via fiber optic cables and satellite transmission. No assurances can be given that the Company will succeed in developing either of such technologies within a time frame that will enable it to capitalize upon its investment, or at all. Competition The markets in which the Company operates are extremely competitive and can be significantly influenced by the marketing and pricing decisions of the larger industry participants. The barriers to entry are not insurmountable in any of the markets in which the Company competes. The Company expects competition in these markets to intensify in the future. Telecommunications The market for prepaid calling cards has become highly competitive. In the prepaid calling card market, the Company competes with other providers of prepaid calling cards and with providers of telecommunications services in general. Many of the largest telecommunications providers, including AT&T, MCI WorldCom and Sprint, currently market prepaid calling cards, which in certain cases, compete with the prepaid calling cards 22 sold by the Company. These companies are substantially larger and have greater financial, technical, engineering, personnel and marketing resources, longer operating histories, greater name recognition and larger customer bases than the Company. The Company also competes with smaller, emerging carriers in the prepaid calling card market, including Star Telecommunications, Inc., RSL Communications, Ltd., and Pacific Gateway Exchange, Inc. In marketing prepaid calling cards to customers outside the U.S. market, the Company competes with the large PTTs, such as British Telecommunications (BT) in the U.K. The Company believes that additional competitors are likely to enter the prepaid calling card market (including Internet-based service providers and other telecommunications companies) during the next several years. With respect to its other telecommunication services, the Company competes with (i) interexchange carriers and other long distance resellers and providers, including large carriers such as AT&T, MCI WorldCom and Sprint; (ii) foreign PTTs; (iii) other providers of international long distance services such as STAR Telecommunications, Inc., Pacific Gateway Exchange, Inc., RSL Communications Ltd. and Viatel, Inc.; (iv) alliances that provide wholesale carrier services, such as Global One (Sprint, Deutsche Telekom AG and France Telecom S.A.) and Uniworld (AT&T, Unisource-Telecom Netherlands, Telia AB, Swiss Telecom PTT and Telefonica de Espana S.A.); (v) new entrants to the domestic long distance market such as the regional bell operating companies in the U.S., who have announced plans to enter the U.S. interstate long distance market pursuant to recent legislation conditionally authorizing such entry, and utilities such as RWE Aktiengesellschaft in Germany; and (vi) small long distance resellers. Moreover, some of the Company's competitors have announced business plans similar to the Company's regarding the expansion of telecommunications networks into Europe. Many of the Company's competitors are significantly larger and have substantially greater market presence, as well as greater financial, technical, operational, marketing and other resources and experience than the Company. The Company competes for customers in the telecommunications markets primarily based on price and, to a lesser extent, the type and quality of service offered. Increased competition could force the Company to reduce its prices and profit margins if its competitors are able to procure rates or enter into service agreements that are comparable to or better than those the Company obtains, or are able to offer other incentives to existing and potential customers. Similarly, the Company has no control over the prices set by its competitors in the long distance resale carrier-to-carrier market. Internet Access The Company's current and prospective competitors in the Internet access market include many large companies that have substantially greater market presence, as well as greater financial, technical, operational, marketing and other resources and experience than the Company. The Company's Internet access business competes or expects to compete directly or indirectly with several types of companies: (i) other national and regional commercial Internet service providers, such as NETCOM On-Line Communication Services, Inc. ("NETCOM"), and Earthlink Network, Inc. ("Earthlink"); (ii) established online services companies that offer Internet access, such as America Online, Inc. ("AOL"), CompuServe Interactive Services, Inc. ("CompuServe") and Prodigy Communications Corporation ("Prodigy"); (iii) computer software and technology companies such as Microsoft; (iv) national long distance telecommunications carriers, such as AT&T, MCI WorldCom and Sprint; (v) regional bell operating companies; (vi) cable television operators, such as Comcast Corporation Liberty Media Group ("Liberty Media") and Time Warner Inc. ("Time Warner"); (vii) nonprofit or educational Internet service providers; (viii) newly- licensed providers of spectrum-based wireless data services; and (ix) competitive local telephone service providers such as AT&T and MCI WorldCom. The Company believes that its ability to compete successfully in the Internet access market depends upon a number of factors including: (i) market presence; (ii) the adequacy of the Company's customer support services; (iii) the capacity, reliability and security of its network infrastructure; (iv) the ease of access to and navigation of the Internet; (v) the pricing policies of its competitors and suppliers; (vi) regulatory price requirements for interconnection to and use of existing local exchange networks by Internet service providers; (vii) the timing of 23 introductions of new products and services by the Company and its competitors; (viii) the Company's ability to support existing and emerging industry standards; and (ix) trends within the industry as well as the general economy. There can be no assurance that the Company will have the financial resources, technical expertise or marketing and support capabilities to continue to compete successfully in the Internet access market. Internet Telephony The long distance telephony market and, in particular, the Internet telephony market, is highly competitive. Net2Phone's competitors include AT&T, MCI WorldCom and Sprint in the United States and foreign telecommunications carriers. During the past several years, a number of companies have introduced services that make Internet telephony services available to businesses and consumers. In addition to Net2Phone, AT&T Jens (a Japanese affiliate of AT&T), ICG Communications, IPVoice.com, ITXC, OzEmail (which was acquired by MCI WorldCom), RSL Communications (through its Delta Three subsidiary), I-Link and iBasis (formerly known as VIP Calling) provide a range of voice-over-the- Internet services. These companies offer PC-to-phone or phone-to-phone services that are similar to the services Net2Phone offers. Some, such as AT&T Jens and OzEmail, offer these services within limited geographic areas. Additionally, a number of companies have recently introduced Web-based voice mail services and voice-chat services to Internet users. Regulation Telecommunications As a multinational telecommunications company, the Company is subject to varying degrees of regulation in each of the jurisdictions in which it operates. As a non-dominant carrier lacking substantial power to influence market prices in the U.S., the Company's provision of international and domestic long distance telecommunications services in the U.S. is generally subject to less regulation than a carrier that has such power. Despite recent trends toward deregulation, some of the countries in which the Company intends to provide telecommunications services do not currently permit the Company to provide public switched voice telecommunications services. In those countries in which the Company operates that are not yet open to public switched voice service competition, the Company provides services to closed user groups and a variety of value-added services, as permitted by each country's laws. Regulation of Domestic Telecommunications Services. In the U.S., provision of the Company's services is subject to the provisions of the Communications Act, as amended by the Telecommunications Act of 1996 (the "Telecommunications Act") regulations promulgated thereunder, as well as the applicable laws and regulations of the various states administered by the relevant state authorities. The recent trend in the U.S., for both federal and state regulation of telecommunications service providers, has been in the direction of reducing regulation. Nonetheless, the FCC and relevant state authorities continue to regulate ownership of transmission facilities, provision of services and the terms and conditions under which the Company's services are provided. Non-dominant carriers, such as the Company, are required by federal and state law and regulations to file tariffs listing the rates, terms and conditions for the services they provide. In October 1996, the FCC adopted an order (the "Detariffing Order") which eliminated the requirement that non- dominant interstate carriers such as the Company maintain tariffs on file with the FCC for domestic interstate services. The Detariffing Order has been appealed to the U.S. Court of Appeals for the D.C. Circuit, and a stay has been issued pending a decision on the merits of the appeal. It is unclear when the Court will rule on the appeal. On May 8, 1997, the FCC issued an order to implement the provisions of the Telecommunications Act relating to the preservation and advancement of universal telephone service (the "Universal Service Order"). The Universal Service Order requires all telecommunications carriers providing interstate telecommunications services to contribute to universal support by contributing to (i) a fund for schools and libraries, (ii) a fund for rural health care and (iii) a fund for the development of regions characterized by high telecommunications costs and low income levels (collectively, the "Universal Service Funds"). These contributions became due beginning in 1998 for all providers of interstate telecommunications services. Such contributions are assessed based on 24 certain defined interstate and international end user telecommunications revenues. Contribution factors vary quarterly, and carriers, including the Company, are billed each month. In addition, many state regulatory agencies have instituted proceedings to revise state universal support mechanisms to make them consistent with the requirements of the Telecommunications Act. As a result, the Company will be subject to state, as well as federal, universal service fund contribution requirements, which will vary from state to state. In July 1999, the United States Court of Appeals for the Fifth Circuit released its decision reviewing the FCC's Universal Service Order. This decision will have a significant impact on carrier's obligations to make payments to the FCC's Universal Service Funds. The Court found that the FCC cannot include intrastate revenues in the calculation of universal service contributions. Local exchange carriers' revenues are largely intrastate and their interstate revenues are primarily from other carriers and not subject to universal service assessment. Therefore, the contributions required to be made by these carriers will be sharply reduced, placing an even greater burden on interexchange carriers, including the Company, to fund the universal service program. The Court also reversed the FCC's decision to include the international revenues of interstate carriers in the universal service contribution base. In implementing the Court's decision, the FCC has amended its universal service fund rules and removed intrastate-end user telecommunications revenues from the assessment base for the schools and libraries and rural health care support mechanisms. The FCC will assess contributions to the universal service program using a single contribution factor based on interstate and international end-user telecommunications revenues. The proposed contribution factor for November and December 1999 is 5.8% of interstate and international end-user telecommunications revenues. This increase in the universal service contribution factor may significantly increase the Company's contribution to the FCC's Universal Service Fund. Pursuant to the Universal Service Order, all carriers are required to submit a Universal Service Fund worksheet in March and September of each year. Starting April 1, 2000, carriers will be required to annually file a single telecommunications reporting worksheet for the FCC's Universal Service Fund, Telecommunications Relay Services, Local Number Portability, and North American Numbering Plan programs. The amounts remitted to the Universal Service Fund may be billed to the Company's customers. If the Company does not bill these amounts to its customers, its profit margins may be less than if it had elected to do so. However, if the Company elects to bill these amounts to its customers, customers may reduce their use of the Company's services, or elect to use the services provided by the Company's competitors, which may have a material adverse effect upon the Company's business, financial condition, or results of operations. On September 29, 1999, Bell Atlantic-New York ("BANY") filed with the FCC its Section 271 application for authority to provide interLATA interexchange service to customers in New York. The FCC has ninety days to review BANY's Section 271. Southwestern Bell Telephone Company ("SWBT") has received the Texas Public Utilities Commission's approval of its Section 271 application to provide interLATA interexchange service to customers in Texas and will soon file its Section 271 application with the FCC. If the FCC subsequently approves BANY's and SWBT's Section 271 applications, interexchange carriers, such as the Company, will be subjected to increased competition from these companies in the New York and Texas markets for interexchange services. As a result, the Company may face increased pressure to reduce its rates for interexchange services which may have an adverse impact on the Company's revenues. In addition, it is likely that Bell Atlantic, SWBT, US West, and Bell South will shortly file Section 271 applications in additional states, which if granted, would further increase competition in the provision of interexchange services and result in downward price pressures for such services in these states. The FCC recently instituted a rulemaking proceeding in which it is determining whether to allow the regional bell operating companies to provide advanced data services (certain of which are currently provided by the Company) through a structurally separated and largely deregulated subsidiary. Such companies are currently barred from providing such services, except under certain limited circumstances. The proposed rulemaking would permit the provision of such services to cross the boundaries of the approximately 200 local telephone calling 25 areas that were created in 1984 in connection with the divestiture by AT&T of the regional bell operating companies. If the FCC adopts such a rule, it could have a material adverse affect on the Company by enabling the regional bell operating companies to more effectively compete with the Company with respect to these services. In addition to regulation by the FCC, the majority of the states require the Company to register or apply for certification prior to initiating intrastate interexchange telecommunications services. To date, the Company, together with its subsidiaries, is authorized through certification, registration or on a deregulated basis to provide intrastate interexchange telecommunications services in 49 states. State issued certificates of authority to provide intrastate interexchange telecommunications services can generally be conditioned, modified, canceled, terminated or revoked by state regulatory authorities for failure to comply with state law and/or the rules, regulations and policies of the state regulatory authorities. Fines and other penalties also may be imposed for such violations. U.S. Regulation of International Telecommunications Services. International common carriers, such as the Company, are required to obtain authority under Section 214 of the Communications Act and file a tariff containing the rates, terms and conditions applicable to their services prior to initiating their international telecommunications services. The Company has obtained a global Section 214 authority from the FCC to use, on a facilities and resale basis, various transmission media for the provision of international switched and private line services. Non-dominant international carriers such as the Company must file their international tariffs and any revisions thereto with one day's notice. Under the FCC's revised rules, international telecommunications service providers are only required to file copies of their contracts with dominant foreign carriers, and these contracts may be filed with the FCC on a confidential basis. The FCC's rules also require that the Company file periodically a variety of reports regarding the volume of its international traffic and revenues and use of international facilities. In addition to the general common carrier principles, and as discussed below, the Company is also required to conduct its facilities-based international business in compliance with the FCC's International Settlements Policy (the "IS Policy"), or an FCC approved alternative settlement arrangement. The Company's FCC authorizations also permit the Company to resell international private lines interconnected to the public switched telephone networks ("PSTNs") for the provision of switched services in those countries that have been found by the FCC to offer "equivalent opportunities" to U.S. carriers or to WTO member countries without a finding of equivalency where certain settlement rate requirements are met. To date, the FCC has approved the provision of switched services over private lines, interconnected to the public switched network, between the United States and the following countries: Canada, the U.K., Sweden, Australia, the Netherlands, New Zealand, Germany, France, Belgium, Denmark, Luxembourg, Norway, Austria, Switzerland, Italy, Japan, Hong Kong, Ireland, Spain, Iceland, Finland, and Israel. The FCC currently imposes certain restrictions upon the use of the Company's private lines between the U.S. and such approved countries. The Company may not route traffic to or from the U.S. over a private line between the U.S. and an "approved" country (such as the U.K.) if such traffic originates or terminates in a third non-"approved" country at rates that are not publicly available. Following implementation of the Full Competition Directive by member states of the European Union, and the WTO Agreement by the signatories, the FCC may authorize the Company to originate and terminate traffic over its private line between the U.S. and the U.K. and (pursuant to ISR authority) over additional private lines to additional countries. The FCC administers a variety of international service regulations, including the IS Policy. The IS Policy governs the permissible arrangements between U.S. carriers and their foreign correspondents to settle the cost of terminating traffic over each other's networks, the rates for such settlement and permissible deviations from these policies. As a consequence of the increasingly competitive global telecommunications market, the FCC has adopted a number of policies that permit carriers to deviate from the IS Policy under certain circumstances that promote competition. The FCC also requires carriers such as the Company to report any affiliations, as defined by the Commission, with foreign carriers. In May 1999, the FCC issued an order exempting competitive carriers and specified competitive routes from the IS Policy. Specifically, the FCC's May 1999 Order eliminated the IS Policy for arrangements with non-dominant foreign carriers (i.e., those that lack market power) and for arrangements with any carrier, dominant or 26 non-dominant, on routes deemed "competitive" by the FCC. The FCC has determined that the following international routes qualify for relief from the FCC's IS Policy and associated filing requirements: Canada, Denmark, France, Germany, Hong Kong, Ireland, Italy, The Netherlands, Norway, Sweden, and the U.K. Historically, the Company's exemption from the IS Policy has been a chief factor enabling it to offer competitive international long distance services. Under the FCC's May 1999 order, providers of traditional telephone services will have increased flexibility to enter into more economically efficient arrangements with foreign correspondent carriers, which could, over time, decrease the competitive price advantage of the Company's international services, and make these services less attractive to our customers. The Company offers its call reorigination services pursuant to an FCC authorization (the "Section 214 Switched Voice Authorization") under Section 214 of the Communications Act and certain relevant FCC decisions. The FCC has determined that call reorigination services that use uncompleted call signaling do not violate U.S. or international law, but has held that U.S. companies providing such services must comply with the laws of the countries in which they operate as a condition of such companies' Section 214 Switched Voice Authorizations. The FCC reserves the right to condition, modify or revoke any Section 214 Authorizations and impose fines for violations of the Communications Act or the FCC's regulations, rules or policies promulgated thereunder, or for violations of the clear and explicit telecommunications laws of other countries that are unable to enforce their laws against call reorigination using uncompleted call signaling. FCC policy provides that foreign governments that satisfy certain conditions may request FCC assistance in enforcing their laws against call reorigination providers based in the U.S. that are violating the laws of these jurisdictions. Thirty countries have formally notified the FCC that call reorigination services violate their laws. The FCC has held that it would consider enforcement action against companies based in the U.S. engaged in call reorigination by means of uncompleted call signaling in countries where this activity is expressly prohibited. The FCC has granted a complaint by the Philippines Long Distance Company, Inc. and required U.S. carriers to stop providing call reorigination to customers in the Philippines. This decision is subject to petitions for reconsideration. There can be no assurance that the FCC will not take further action in the future. Enforcement action could include an order to cease providing call reorigination services in such country, the imposition of one or more restrictions on the Company, monetary fines or, in extreme circumstances, the revocation of the Company's Section 214 Switched Voice Authorization, and could have a material adverse effect on the Company's business, financial condition and results of operations. The FCC is currently considering a petition filed by the Telecommunications Resellers Association requesting that the FCC cease enforcing foreign laws against call reorigination. Regulatory requirements pertinent to the Company's operations will continue to evolve as a result of the WTO Agreement, federal legislation, court decisions, and new and revised policies of the FCC. In particular, the FCC continues to refine its international service rules to promote competition, reflect and encourage liberalization in foreign countries and reduce international accounting rates toward cost. In connection with this process, the FCC adopted new lower accounting rate benchmarks that became effective on January 1, 1998. Under the FCC's new benchmarks, after a transition period of one to four years, depending on a country's income level, U.S. carriers may be required to pay foreign carriers significantly lower rates for the termination of international services. These rates range from a $0.15/minute benchmark for upper income countries such as the U.K. to $0.23/minute for lower income countries such as China. Moreover, the FCC has revised its Foreign Carrier Entry Policy as part of its efforts to change its rules to implement the WTO Agreement. To date, the FCC has made no pronouncement as to whether refiling arrangements are inconsistent with the regulations of the U.S. or the International Telecommunication Union (the "ITU"), and a 1995 petition to the FCC for declaratory ruling regarding Sprint's Fonaccess service was recently withdrawn. Although it is possible that the FCC will determine that refiling violates U.S. and/or international law and that such a finding could have a material adverse effect on the Company's business, operating results and financial condition, the FCC is not currently considering such issues in any active proceeding. European Regulation of Telecommunications Services. In Europe, the regulation of the telecommunications industry is governed at a supranational level by the European Union. The European Union's institutions, such as the European Commission, are responsible for creating pan-European policies. Through its legislation, the 27 European Union has developed a regulatory framework aimed at creating an open, competitive telecommunications market. The European Union was established by the Treaty of Rome and subsequent conventions and the European Commission and the Council of Ministers of the European Union are authorized by such treaties to issue European Union "directives." European Union member states are required to implement these directives through national legislation. If an European Union member state fails to adopt such directives, the European Commission may take action, including referral to the European Court of Justice, to enforce the directives. In 1990, the European Union issued the Services Directive, which required each European Union member state to abolish existing monopolies in telecommunications services, with the exception of voice telephony. The intended effect of the Services Directive was to permit the competitive provision of all services, including value-added services and voice services to closed user groups, other than public voice telephony. However, as a consequence of local implementation of the Services Directive through the adoption of national legislation, there are differing interpretations of the definition of prohibited voice telephony and permitted value-added and closed user group services. Voice services accessed by customers through leased lines are permissible in all European Union member states. The European Commission has generally taken a narrow view of the services classified as public voice telephony, declaring that voice services may not be reserved to the ITOs if (i) dedicated customer access is used to provide the service; (ii) the service confers new value-added benefits on users; or (iii) calling is limited by a service provider to a group having legal, economic or professional ties. In March 1996, the European Union adopted the Full Competition Directive containing two provisions which required European Union member states to allow the creation of alternative telecommunications infrastructures by July 1, 1996, and which reaffirmed the obligation of European Union member states to abolish the ITOs' monopolies in voice telephony by 1998. The Full Competition Directive encouraged European Union member states to accelerate the liberalization of voice telephony. Certain European Union countries were allowed to delay the abolition of monopolies in public voice telephony based on exemptions established in the Full Competition Directive. These countries include Luxembourg (July 1998), Spain (December 1998), Portugal and Ireland (January 2000) and Greece (January 2002). Subsequently, Ireland decided to liberalize its regulations as of an earlier date, December 1, 1998. The European Commission has brought infringement proceedings against the following countries for failure to comply with European Union Directives: Belgium, Denmark, Greece, Italy, Luxembourg and Portugal. In addition to the foregoing regulations, the European Union has adopted the Interconnection Directive and the Licensing Directive. These measures attempt to harmonize telecommunications regulations among the member states of the European Union. The Interconnection Directive provides that ITOs are obliged to interconnect with other operators requesting to do so, and to enter into such arrangements on transparent, objective and non-discriminatory terms. Disputes over interconnection rates, terms and conditions have arisen in several member states, and there can be no guarantee that they will be resolved in a manner that will not have a material adverse effect on the Company's operations in Europe. The Licensing Directive provides for the establishment of a national regulatory authority independent of the ITO in each member state of the European Union, and provides that member states may reject applications for licenses only upon certain narrowly-defined grounds. Each European Union member state in which the Company currently conducts or plans to conduct its business has a different regulatory regime, and such differences have continued beyond January 1998. The requirements for the Company to obtain necessary approvals vary considerably from one member state to another and are likely to change as competition is permitted in new service sectors. In addition, member states may require individual licenses for reserved public telephony services and the creation of alternative infrastructure, but not for data, value-added or closed user group services. In connection with the growth of its European operations, the Company has obtained a number of licenses to provide telecommunications services in Europe. Through its U.K. subsidiary, IDT Global Limited ("IDT Global"), the Company has obtained a license to provide international simple voice resale services in the U.K., 28 and a license to operate domestic and international telecommunications facilities in the U.K. IDT Global has also obtained a license to provide voice telephony services in Frankurt, Germany. In addition, through its Dutch holding subsidiary, IDT Europe BV, the Company has obtained a nationwide voice license in France. In addition, the same subsidiary holds a General Telecommunications License in Ireland. In February 1999, the Company acquired Orion Telekom BV, a Netherlands based provider of telecommunications services. Included in the purchase was Orion's Netherlands voice license. Orion, (now known as IDT Netherlands BV) is a wholly-owned subsidiary of IDT Europe BV, a wholly-owned subsidiary of the Company. In Austria, a voice license has been obtained for Strategic Telecommunications Belgium. Other Overseas Markets. The Company is subject to the regulatory regimes in each of the countries in which it conducts business. Local regulations range from permissive to restrictive, depending upon the country. In the past, the Company has experienced problems in certain countries and has, in certain instances, modified or terminated its services to comply with local regulatory requirements. Internet Access Internet service providers are generally considered "enhanced service providers" within the U.S. and are exempt from U.S. federal and state regulations governing common carriers. Accordingly, the Company's provision of Internet access services are currently exempt from tariffing, certification and rate regulation. Nevertheless, regulations governing disclosure of confidential communications, copyright, excise tax, and other requirements may apply to the Company's provision of Internet access services. The Company cannot predict the likelihood that state, federal or foreign governments will impose additional regulation on the Company's Internet business, nor can it predict the impact that future regulation will have on the Company's operations. The Telecommunications Act of 1996 contained provisions imposing criminal liability on: (1) persons sending or displaying indecent material on an interactive computer service such as the Internet in a manner available to minors and (2) entities knowingly permitting facilities under their control to be used for such activities. These provisions were held to be unconstitutional by the U.S. Supreme Court in 1997. In 1998, Congress passed the Child Online Protection Act ("COPA") which imposes criminal liability and civil liability on any person who by means of the World Wide Web, makes any communication for commercial purposes available to minors that includes material that is harmful to minors. COPA was enacted to prevent minors' access to indecent material on the Internet by criminalizing certain communications to minors and imposing a "filtering" requirement on Internet service providers ("ISPs"). The sections of COPA that impose criminal and civil liability for the dissemination of harmful material to minors have been stayed by the U.S. District Court for the Eastern District of Pennsylvania pending a trial on their constitutionality. However, the "filtering" requirement in COPA has not been stayed, and ISPs must notify users of existing measures (e.g. hardware, software, and filtering devices) that may assist the users in limiting minors' access to harmful material. Subsequent enforcement of the liability provisions of COPA restricting minors' access to harmful material may chill the development of Internet content or have other adverse effects on ISPs such as the Company. In addition, in light of the uncertainty attached to the enforcement of the law, there can be no assurances that the Company would not have to modify its operations to comply with COPA, including, among other things, prohibiting users from maintaining home pages on the Web that contain material deemed harmful to minors. In December 1996, the FCC initiated a Notice of Inquiry regarding whether to impose regulations or surcharges upon providers of Internet access and Information Service. The Notice of Inquiry, and several ongoing FCC proceedings, seek public comment as to whether to impose or to continue to forebear from regulation of Internet and other packet-switched network service providers. The Notice of Inquiry specifically identifies Internet telephony as a subject for FCC consideration. In addition, in April 1998, the FCC issued a Report to Congress on its implementation of the universal service provisions of the Telecommunications Act. In its report, the FCC indicated that it would reexamine its policy of not requiring Internet service providers to contribute to the universal service mechanisms when they provide their own transmission facilities and engage in data transport over those facilities in order to provide an information service. Any such contribution would be related 29 to the Internet service provider's provision of telecommunications services itself. The Company can not predict the outcome of any future proceedings that may impact the Company's provision of Internet access or that may impose additional requirements, regulations or charges upon IDT's provision of such services. Internet Telephony The use of the Internet to provide telephone service is a recent development. Currently, the FCC is considering whether or not to impose surcharges or additional regulations upon certain providers of Internet telephony. In April 1998, the FCC issued its report to Congress concerning its implementation of the universal service provisions of the Telecommunications Act. In the report, the FCC indicated that it would examine the question of whether certain forms of "phone-to-phone" Internet protocol telephony are information services or telecommunications services. It noted that the FCC did not have, as of the date of the report, an adequate record on which to make any definitive pronouncements, but that the record before it suggested that certain forms of phone-to-phone Internet telephony appear to have the same functionality as non-Internet protocol telecommunications services and lack the characteristics that would render them information services. If the FCC were to determine that certain services are subject to FCC regulations as telecommunications services, the FCC noted that it may find it reasonable to require Internet service providers to make universal service contributions, pay access charges or to be subject to traditional common carrier regulation. In September 1998, two regional bell operating companies advised Internet telephony providers that these companies would impose access charges on Internet telephony traffic. One of these bell operating companies also petitioned the FCC for a declaratory ruling that providers of interstate Internet telephony must pay federal access charges and petitioned the public utilities commissions of Nebraska and Colorado for similar rulings concerning payment of access charges for intrastate telephone calls. The regional bell operating company involved in the Colorado proceeding has requested the dismissal of its petition. The Nebraska Public Service Commission ("PSC") has dismissed the regional bell operating company's complaint but plans to hold a public hearing and seek comment on the following issues: (1) whether its preliminary finding that traffic to ISPs is "local" in nature; (2) how carriers should compensate each other for calls placed to ISPs; (3) whether interexchange carriers providing Internet telephony must pay intrastate access charges; and (4) whether ISPs and providers of Internet telephony should contribute to the state universal service fund. The outcome of the Nebraska and FCC proceedings is uncertain. If the FCC or the Nebraska PSC decide that access charges may be levied against Internet telephony providers, the Company's majority-owned Net2Phone subsidiary would have to pay interstate access charges and intrastate access charges in Nebraska. Moreover, if the Nebraska PSC subjects ISPs or Internet telephony providers to state universal service fund contributions, Net2Phone's revenues would be impacted. Should additional state public utility commissions make similar rulings, Net2Phone may not be able to operate profitably in any state that assesses access or universal charges against it. In September 1999, the FCC initiated a notice of inquiry regarding voice over Internet telephony (both computer to computer and phone to phone Internet telephony) seeking comment on the availability of Internet telephony, the extent it has begun to replace traditional telecommunications services, the percentage of disabled persons who utilize Internet telephony, and whether it falls under the purview of Section 255 of the Telecommunications Act. Section 255 of the Telecommunications Act requires a provider of telecommunications service to ensure that its service is accessible and usable by persons with disabilities, if readily achievable. Should the FCC subsequently decide to adopt rules subjecting Internet Telephony to the requirements of Section 255, it may materially impact the Company's operations by requiring the Company to ensure that its Internet telephony services are compatible with telecommunications devices used by the disabled. To the Company's knowledge, there are currently no domestic laws or regulations that prohibit voice communications over the Internet. Several efforts have been made to enact federal legislation that would either regulate or exempt from regulation services provided over the Internet. State public utility commissions may also retain jurisdiction to regulate the provision of intrastate Internet telephony services, and could initiate proceedings to do so. A number of countries that currently prohibit competition in the provision of voice telephony have also prohibited Internet telephony. Other countries permit but regulate Internet telephony. If 30 Congress, the FCC, state regulatory agencies, foreign governments or supranational bodies begin to regulate Internet telephony, there can be no assurances that any such regulation will not materially adversely affect the Company's business, financial condition or results of operations. Intellectual Property The Company's success and ability to compete is dependent in part upon its technology, although the Company believes that its success is more dependent upon its technical expertise than its proprietary rights. The Company relies on a combination of patent, copyright, trademark and trade secret laws and contractual restrictions to establish and protect its technology. The Company does not currently have any issued patents or registered copyrights. The Company's policy is to require its employees and consultants to execute confidentiality agreements upon the commencement of their relationships with the Company. These agreements provide that confidential information developed or made known during the course of a relationship with the Company is to be kept confidential and may not be disclosed to third parties except in specific circumstances. There can be no assurance that the steps taken by the Company will be adequate to prevent misappropriation of its technology or other proprietary rights or that the Company's competitors will not independently develop technologies that are substantially equivalent or superior to the Company's technology. In addition, there can be no assurance that licenses for any intellectual property that might be required by the Company for it to provide its services or products would be available on reasonable terms, if at all. In connection with the initial public offering of Net2Phone, IDT assigned various pending federal service mark applications and three service mark registrations to Net2Phone on May 7, 1999. IDT also assigned its interest in three United States patent applications relating to the technology underlying the Net2Phone services as well as pending foreign counterpart applications. The Company owns registered service marks for the mark IDT, IDT and antenna design, Colombianita, Dominicall and Megatel. In addition, the Company has applications pending with respect to the registration of service marks relating to its various operations, including, Click2Reserve, Click2Take, Columbiana, Cyberspace Kids, Debit Talk, Gifts for Gab, Global America, Global Call, IP Central Office, LA Universal, Mega Mexico, Mexicall, Net2Dine.com, Nuestra Voz and Virtual Dime. IDT aggressively protects its intellectual property and continues to build its portfolio of service marks. In addition, the Company has entered into an agreement pursuant to which it has received a non-exclusive license to utilize in certain European countries the technologies covered by a European patent relating to the processing of calls made with prepaid calling cards. Under the agreement, the Company is entitled to receive royalties from companies selling prepaid calling cards in Europe who acquire license rights under the patent or against which the patent is successfully enforced. Under the patent agreement, the Company is permitted to grant sublicenses with respect to prepaid calling cards in Europe, and receive royalties from such sublicenses. The Company expects that this arrangement will be attractive to European carriers because it will enable them to fulfill demand for their services without raising their total costs, and the Company believes that it will help to accelerate the growth of its carrier business in Europe. Employees As of October 20, 1999, the Company and its subsidiaries had a total of approximately 1,271 employees, including 373 in technical support and customer service, 125 in sales and marketing, 115 in technical staff, 115 in general operations and 100 in management and finance. The Company also had a total of 35 employees in Europe. Union Telecard Alliance, LLC, in which the Company has a 51% interest, employed 75 persons. The Company's majority-owned Net2Phone subsidiary had 333 full-time employees as of October 20, 1999. The Company believes that its relations with its employees are good. None of the Company's employees is represented by a labor union or covered by a collective bargaining agreement, and the Company has never experienced a work stoppage. 31 Item 2. PROPERTIES. The Company's principal facilities total approximately 66,000 square feet and are primarily located in two buildings in Hackensack, New Jersey. The Company occupies facilities in one building pursuant to a lease which expires on April 30, 2002 and occupies office space in a second building, pursuant to a lease with an entity controlled by Howard S. Jonas, the Company's Chairman and Chief Executive Officer, which expired in December 1998; however, the Company renewed the lease for an additional two year term. The Company also leases additional office space totaling approximately 6,000 square feet in two separate buildings located in Hackensack, New Jersey. The Company's 51% owned subsidiary, Union, occupies approximately 4,000 square feet of space pursuant to a ten year sublease agreement. On March 25, 1999, IDT entered into a 10 year lease agreement for approximately 12,000 square feet in Newark, New Jersey and on July 12, 1999, IDT entered into a 10 year lease agreement for approximately 6,000 square feet of space in Los Angeles, California, both primarily to house telecommunications equipment. In addition, IDT leases space (typically less than 500 square feet) in various other geographic locations to house the telecommunications equipment for each of its POPs. On April 20, 1999, IDT's subsidiary, 225 Old NB Road, Inc., purchased the building leased by IDT and its subsidiary, InterExchange, located in Piscataway, New Jersey, consisting of approximately 65,295 square feet, of which IDT and InterExchange occupy approximately 40,057 square feet. The balance of the building is sublet to third parties. In support of its international expansion efforts, the Company maintains various international office locations, including in London, England; Paris, France; Santa Fe Colony, Mexico; and Rotterdam, the Netherlands. Item 3. LEGAL PROCEEDINGS. In December 1995, Surfers Unlimited, L.L.C. filed a breach of contract action in the New Jersey Superior Court, Bergen County. The suit names a subsidiary of the Company as defendant and seeks restitutional and consequential damages in an unspecified amount for interference with prospective business advantages, breach of contract and improper use of confidential and proprietary information. Howard S. Jonas has also been named as a defendant in the action. The Company's subsidiary has filed a counterclaim based on interference with prospective business advantages, breach of contract and improper use of confidential and proprietary information. In September 1999, the Company's subsidiary, Howard S. Jonas and Surfers Unlimited L.L.C. entered into a confidential settlement agreement. In January 1997, six former employees alleging employment discrimination commenced a suit in New Jersey Superior Court, Bergen County. Howard S. Jonas has also been named as a defendant in the action. The action claims that the Company has made hiring and promotion decisions based upon the religious backgrounds of the relevant individuals, in violation of federal and state law. The complaint seeks compensatory and punitive damages in an unspecified amount and also seeks statutory multiples of damages. All of the claims arising under federal law were dismissed by the Court in New Jersey Superior Court, Bergen County, leaving the plaintiffs with only the remedies available under state law. Further, the Court granted the Company permission to file counterclaims against all plaintiffs for the alleged unlawful taking of business records. The Company filed such counterclaims in October 1998. Discovery is continuing and a settlement conference has been scheduled for November 10, 1999. In August 1998, a subsidiary of the Company, InterExchange, Inc. ("IX"), filed a complaint in the New Jersey Superior Court, Middlesex County, against PT-1 Communications, Inc. ("PT-1"). The action has been removed to the U.S. District Court for the District of New Jersey. The action arises from a contract in which IX 32 and PT-1 agreed that PT-1 would route its traffic from prepaid calling cards through IX's debit card platform. In the action, IX claimed that PT-1 breached its contract with IX by failing to make required payments under the contract, and claimed compensatory damages in the amount of $8.5 million. In February 1999, PT-1 filed an answer and counterclaim and third party complaint against IX, the Company, and certain of their officers, including Howard S. Jonas. PT- 1 alleges that IX is not entitled to these payments in that IX had breached the agreement, and that, following IX's 1998 merger agreement with the Company, in which IX become a wholly-owned subsidiary of the Company, IX violated its covenant in the agreement that it would not compete with PT-1. PT-1 also alleges, among other things, that the Company and Mr. Jonas tortiously interfered with the contract between IX and PT-1, and that they conspired with IX and its personnel to obtain confidential information relating to PT-1. PT-1 seeks compensatory damages and punitive damages. In May 1999, the Company and Howard S. Jonas filed an answer to PT-1's third party complaint and IX filed a motion for leave to amend their complaint to add Star Telecommunications and Samer Tawfik as additional defendants and to include the additional claims of tortious interference and fraud in the inducement. The Company and individual plaintiffs David Turock, Eric Hecht, Bradley Turock and Richard Robbins have sought leave to amend their counterclaims to include Star Telecommunications as an additional defendant for failure to permit plaintiff to execute certain stock warrants to purchase PT-1 stock. The Court has issued an order which provides that PT-1 may not allege a specific amount of damages although the order does not forbid PT-1 from claiming damages in general. Discovery is continuing and a trial date has not been scheduled. The Company is subject to other legal proceedings and claims which have arisen in the ordinary course of its business and have not been finally adjudicated. Although there can be no assurances in this regard, in the opinion of the Company's management, such proceedings, as well as the aforementioned actions, will not have a material adverse effect on results of operations or the financial condition of the Company. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None. 33 PART II Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY The Common Stock has been quoted on the Nasdaq National Market under the symbol "IDTC" since March 15, 1996, the date of the Company's initial public offering. The table below sets forth the high and low sales prices for the Common Stock as reported by the Nasdaq National Market for the fiscal periods indicated.
High Low ------ ------ Fiscal Year ended July 31, 1998.................................. First Quarter.................................................... $22.13 $ 7.88 Second Quarter................................................... 25.25 15.50 Third Quarter.................................................... 38.13 25.56 Fourth Quarter................................................... 30.00 23.50 Fiscal Year ended July 31, 1999.................................. First Quarter.................................................... $28.50 $11.88 Second Quarter................................................... 21.88 9.50 Third Quarter.................................................... 35.00 11.69 Fourth Quarter................................................... 30.38 18.00
On October 29, 1999, the last sale price reported on the Nasdaq National Market for the Common Stock was $22.875 per share. On the same date, there were approximately 390 holders of record of the Common Stock. The aggregate market value of the voting stock held by non-affiliates of the Registrant, based on the closing price of the Common Stock on October 29, 1999, was approximately $547 million. Shares of Common Stock held by each officer and director and by each person who owns 5% or more of the outstanding Common Stock (assuming conversion of the Company's outstanding Class A Common Stock into Common Stock) have been excluded from this computation in that such persons may be deemed to be affiliates of the Company. This determination of affiliate status is not necessarily a conclusive determination for other purposes. The Company has never declared or paid any dividends on its Common Stock and does not expect to pay dividends for the foreseeable future. The Company's current policy is to retain all of its earnings to finance future growth. Any future declaration of dividends will be subject to the discretion of the Board of Directors of the Company. The availability of funds for the payment of dividends by the Company is dependent on dividends the Company may receive from its subsidiaries, which is subject to certain limitations under state laws. In addition, the Indenture relating to the Company's Senior Notes imposes certain restrictions upon the Company's ability to declare dividends on its Common Stock while the Notes are outstanding. 34 Item 6. SELECTED FINANCIAL DATA. SELECTED CONSOLIDATED FINANCIAL DATA The selected consolidated financial data presented below for each of the five years in the period ended July 31, 1999 has been derived from the Company's consolidated financial statements, which have been audited by Ernst & Young LLP, independent auditors. The selected consolidated financial data should be read in conjunction with the Consolidated Financial Statements and the Notes thereto and other financial information appearing elsewhere in this Report.
Year Ended July 31 ----------------------------------------------- 1995 1996 1997 1998 1999 ------- -------- -------- -------- -------- (in thousands, except per share data) Statement of Operations Data: Revenues: Telecommunications........ $10,789 $ 35,708 $ 99,937 $303,864 $684,572 Internet.................. 875 21,986 32,895 20,001 16,934 Net2Phone................. -- -- 2,355 11,508 30,678 ------- -------- -------- -------- -------- Total revenues.......... 11,664 57,694 135,187 335,373 732,184 Costs and expenses: Direct cost of revenues..... 7,544 36,438 92,214 240,860 575,050 Selling, general and administrative............. 5,992 35,799 41,545 61,975 128,500 Acquired research and development................ -- -- -- 25,000 -- Depreciation and amortization............... 303 1,212 4,873 11,284 26,254 ------- -------- -------- -------- -------- Total costs and expenses............... 13,839 73,449 138,632 339,119 729,804 Income (loss) from operations................. (2,175) (15,755) (3,445) (3,746) 2,380 Other, net(1)............... 30 112 (392) (425) 15,078 Income tax provision (benefit).................. -- -- -- (1,671) 17,850 Minority interests.......... -- -- -- 3,895 (3,309) ------- -------- -------- -------- -------- Net income (loss)............. (2,145) (15,643) (3,837) (6,395) 2,917 Subsidiary redeemable preferred stock dividends.... -- -- -- -- 26,298 ------- -------- -------- -------- -------- Net loss available to common stockholders................. $(2,145) $(15,643) $ (3,837) $ (6,395) $(23,381) ======= ======== ======== ======== ======== Net loss per share-basic and diluted...................... $ (.13) $ (.86) $ (.18) $ (.22) $ (.70) ======= ======== ======== ======== ======== Weighted average number of shares used in calculation of net loss per share-basic..... 16,569 18,180 21,153 28,571 33,530 ======= ======== ======== ======== ======== Balance Sheet Data: Cash and cash equivalents... $ 232 $ 14,894 $ 7,674 $115,284 $ 52,903 Working capital (deficit)... (884) 13,547 4,887 166,380 179,415 Total assets................ 4,197 43,797 58,537 417,196 515,336 Long-term debt.............. -- -- 5,241 101,834 112,973 Total stockholders' equity.. 911 26,843 25,259 238,748 253,405
- -------- (1) For Fiscal 1996, Fiscal 1998 and Fiscal 1999 includes extraordinary losses on retirement of debt, net of income taxes, of $233, $132 and $3,270 respectively. 35 Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Overview General IDT is a leading facilities-based emerging multinational carrier that provides its wholesale and retail customers with integrated and competitively priced international and domestic long distance telecommunications service, Internet access and, through its majority-owned Net2Phone subsidiary, Internet telephony products and services. IDT delivers these services over a high- quality network consisting of 70 switches in the U.S. and Europe and owned and leased capacity on 16 undersea fiber optic cables. In addition, the Company obtains additional transmission capacity from other carriers. The Company delivers its international traffic worldwide pursuant to its agreements with U.S.-based carriers, foreign carriers, and 23 of the companies that are primarily responsible for providing telecommunications services in particular countries (many of which are commonly referred to as PTTs). In addition, IDT maintains a high-speed network that carries Internet traffic in order to support both its Internet access services and its Internet telephony services. The Company has grown considerably in recent years, generating revenues of $135.2 million, $335.4 million and $732.2 million in Fiscal 1997, Fiscal 1998 and Fiscal 1999, respectively. History The Company entered the international call reorigination business in 1990 to capitalize on the opportunity created by the spread between U.S. and foreign- originated international long distance telephone rates. IDT leveraged the expertise derived from, and calling volume generated by, its call reorigination business to enter the domestic long distance business in late 1993, by reselling long distance services of other carriers to IDT's domestic customers. As a value-added service for its domestic long distance customers, the Company began offering Internet access in early 1994, eventually offering dial-up and dedicated Internet access to individuals and to businesses as stand-alone services. In 1995, IDT began reselling to other long distance carriers access to the favorable telephone rates and special tariffs the Company receives as a result of the calling volume generated by its call reorigination customers. IDT entered the Internet telephony market in August 1996 with its introduction of Net2Phone, and expanded its Internet telephony offerings in October 1997 with the introduction of its Net2Phone Direct service. The Company began marketing its prepaid calling cards in January 1997. In May 1998, the Company acquired a 51% interest in Union Telecard Alliance, LLC which distributes the Company's prepaid calling cards in key markets nationwide. In May 1998, the Company also acquired InterExchange, an operator of one of the largest international prepaid calling card platforms in the United States. Revenues Beginning in Fiscal 1997, the Company began to place increased emphasis on its international telecommunications operations and less emphasis on its Internet access services. In Fiscal 1998 and Fiscal 1999, the Company focused its marketing efforts on expanding the wholesale services offered to other carriers, developing and increasing its retail prepaid calling card business and broadening its range of Internet telephony services and products. As a result of these developments, the Company's telecommunications revenues as a percentage of total revenues increased from 90.6% for Fiscal 1998 to 93.5% for Fiscal 1999. In addition, the Company's revenues from telecommunications operations increased from $303.9 million during Fiscal 1998 to $684.6 million during Fiscal 1999. Revenues from the Company's telecommunications operations are derived primarily from the following activities: (i) domestic and international prepaid calling cards; (ii) wholesale carrier services to other long distance carriers; (iii) international retail long distance services to individuals and businesses worldwide (primarily provided through call reorigination services); and (iv) domestic long distance services to individuals and businesses. The Company generates revenues from the sale of its prepaid calling cards to distributors, selling them to distributors at a discount to their face values of different denominations, and 36 recording the sales as deferred revenue until the card user utilizes the calling time. Revenues from the Company's Internet operations are derived primarily from providing Internet access services to individuals and businesses. The Company's majority-owned subsidiary Net2Phone's revenues are derived from the marketing of Net2Phone and Net2Phone Direct services and equipment to individuals, businesses and the Company's foreign partners. Concentration of Customers While the Company's most significant customers vary from quarter to quarter, the Company's five largest customers accounted for 20.8% of revenues in Fiscal 1997, 26.2% of revenues in Fiscal 1998 and 10.9% of revenues in Fiscal 1999. This concentration of revenues increases the risk of nonpayment by customers, and other carriers have experienced significant write-offs related to the provision of wholesale carrier services in situations in which large customers failed to pay their outstanding balances. The Company performs ongoing credit evaluations of its customers, but it generally does not require collateral to support accounts receivable from its customers. Costs and Expenses Direct cost of revenues for the Company's telecommunications services include costs associated with the transmission and termination of international and domestic long distance services. Historically, this expense has primarily been variable, based upon minutes of use, and consists mainly of payments to other long distance carriers and, to a lesser extent, customer/carrier interconnect charges, leased fiber circuit charges and switch facility costs. The direct cost of revenues for Internet access and Net2Phone services consists primarily of leased circuit and network costs and local access costs. Direct cost of revenues for Internet services also includes fees paid to the Company's Alliance Partners. The Company operates a growing facilities-based telecommunications network consisting of (i) 70 switches in the U.S. and Europe; (ii) owned and leased transmission capacity on 16 undersea fiber optic cables connecting the Company's U.S. facilities with its international facilities, and with the facilities of its foreign partners in Europe, Latin America and Asia; and (iii) resale capacity obtained on a per-minute basis from other carriers. The Company seeks to follow a disciplined strategy of establishing significant traffic volumes prior to investing in fixed-cost facilities. As the Company expands its network and the volume of its traffic, the cost of revenues will increasingly consist of fixed costs associated with leased and owned lines, as well as costs arising from the ownership and maintenance of its switches. The fixed nature of these costs may lead to larger fluctuations in gross margins, depending on the minutes of traffic and associated revenues generated by the Company. The Company also expects that these factors will cause the direct cost of revenues to decline as a percentage of revenues over time. However, the improvement in gross margins which would result from an expansion in the Company's network could be partially offset by pricing pressures caused by intense competition, which would have a negative impact on margins. Selling expenses consist primarily of sales commissions paid to independent agents and internal salespersons and advertising costs, which are the primary cost associated with the acquisition of customers. General and administrative expenses include salaries, benefits, professional fees and other corporate overhead costs. These costs have increased in recent fiscal years due to the development and expansion of the Company's operations and corporate infrastructure. The Company's telecommunications revenues are generally associated with lower selling, general and administrative expenses than are the Company's Internet revenues, and the Company's revenues from its wholesale sales of telecommunications services have generally had lower selling, general and administrative expenses than have other types of telecommunications revenues. As a result of these factors, and as a result of the increasing percentage of the Company's revenues that are derived from telecommunications services and the decreased emphasis placed on Internet access services, the Company's selling, general and administrative expenses generally have declined as a percentage of total revenues. However, as the Company expects its prepaid calling card and Internet telephony businesses to grow, it is likely that selling, general and administrative expenses will also grow as a percentage of revenues. 37 Initial Public Offering of Net2Phone On August 3, 1999, Net2Phone completed an initial public offering of 6,210,000 shares of its Common Stock (the "Initial Public Offering"), yielding $85.3 million in net proceeds. After the Initial Public Offering, the Company owned 56.2% of the capital stock of Net2Phone. The Company owns Class A stock that has twice the voting power of Net2Phone's Common Stock. Therefore, after the Initial Public Offering, the Company controlled 64.0% of Net2Phone's vote. Subsequent Events Telefonica Agreement In October 1999, IDT entered into a joint venture agreement with Terra Networks, S.A. (formerly known as Telefonica Interactiva, S.A.) pursuant to which the parties formed two limited liability companies to provide Internet services and products for customers in the United States, mainly targeting and focusing on the Hispanic population in the United States. One company was formed to provide Internet access to customers in the target market, and IDT contributed its dial-up Internet access customers, its managerial resources and facilities and its portfolio of current and future products for Internet access to the new company in exchange for a 49% ownership interest. The other company was formed to develop and manage an Internet portal that will provide content-based Internet services, electronic commerce offerings and other Internet services to customers in the target market. IDT will assist in developing relationships with content producers and content providers and will sell advertising on this new company's portal in exchange for a 10% ownership interest. Terra Networks has agreed to fund the first $30 million of expenses for the ISP joint venture, subject to the completion of certain performance criteria. IDT/Westmintech Joint Venture In September 1999, a subsidiary of the Company entered into an agreement to form a joint venture with Westmintech Company, L.L.C., to provide high speed voice and data services, including without limitation local and long distance telephone service (dedicated and 1+), cable television service (cable and/or fiber optic), on line service with direct Internet access and Internet access services (DSL, dedicated and dial up) and various other Internet services and other technology to the tenants of commercial and residential properties worldwide. The Company will have a 75% ownership interest in the joint venture. Results of Operations The following table sets forth the percentage of revenues represented by certain items in the Company's statement of operations (revenues and costs and expenses are presented net of intercompany transactions):
Year Ended July 31 ------------------- 1997 1998 1999 ----- ----- ----- Revenues: Telecommunications..................................... 74.0 90.6 93.5 Internet............................................... 24.3 6.0 2.3 Net2Phone.............................................. 1.7 3.4 4.2 ----- ----- ----- 100.0% 100.0% 100.0% Costs and expenses: Direct cost of revenues................................ 68.2 71.8 78.5 Selling, general and administrative.................... 30.7 18.5 17.6 Acquired research and development...................... -- 7.4 -- Depreciation and amortization.......................... 3.6 3.4 3.6 ----- ----- ----- Total costs and expenses............................. 102.5 101.1 99.7 ----- ----- ----- Income (loss) from operations............................ (2.5) (1.1) 0.3 Other (net).............................................. (0.3) (0.1) 2.5 ----- ----- ----- Income (loss) before income taxes, minority interests and extraordinary items .................................... (2.8) (1.2) 2.8 ===== ===== =====
38 Fiscal 1999 Compared to Fiscal 1998 Results of Operations Revenues. Revenues increased 118.3% from approximately $335.4 million in Fiscal 1998 to approximately $732.2 million in Fiscal 1999. Telecommunications revenues increased 125.3% from approximately $303.9 million in Fiscal 1998 to approximately $684.6 million in Fiscal 1999. Internet access revenues decreased 15.3% from approximately $20.0 million in Fiscal 1998 to approximately $16.9 million in Fiscal 1999. Internet telephony revenues increased 166.6% from approximately $11.5 million in Fiscal 1998 to approximately $30.7 million in Fiscal 1999. Telecommunications revenues increased 125.3%, primarily as a result of a 247.5% increase in minutes of use, from approximately 805.8 million to approximately 2.8 billion. Telecommunications minutes increased primarily due to the addition of wholesale carrier service clients, increased usage by existing clients, and increased marketing and sales of the Company's prepaid calling cards. The addition of wholesale carrier services clients and the increased use by existing clients resulted in an increase in wholesale carrier services revenues of 73.4%, from approximately $166.7 million in Fiscal 1998 to approximately $289.0 million in Fiscal 1999. As a percentage of telecommunications revenues, wholesale carrier service revenues decreased from approximately 54.9% to 42.2%, primarily due to the significant increase in prepaid calling card revenues both in real dollars and as a percentage of overall telecommunications revenues. Revenues from sales of prepaid calling cards increased 236.7% from approximately $108.1 million in Fiscal 1998 to approximately $364.0 million in Fiscal 1999. As a percentage of telecommunications revenues, prepaid calling card revenues increased from approximately 35.6% to approximately 53.2%. As a percentage of telecommunications revenues, international retail services revenues decreased from 7.5% to 3.0%. As a percentage of total revenues, Internet access revenues decreased from approximately 6.0% for Fiscal 1998 to approximately 2.3% for Fiscal 1999. This decrease was due to the substantial increase in telecommunications revenues as a percentage of total revenues, as well as a dollar decrease in Internet access revenues due to a decrease in total dial-up subscribers. Internet telephony revenues as a percentage of total revenues increased from 3.4% for Fiscal 1998 to 4.2% for Fiscal 1999. The increase in Internet telephony revenues was primarily due to an increase in billed-minute usage resulting from increased marketing of Net2Phone's Internet telephony products and services. Direct Cost of Revenues. The Company's direct cost of revenues increased by 138.7% from approximately $240.9 million in Fiscal 1998 to approximately $575.0 million in Fiscal 1999. As a percentage of total revenues, these costs increased from 71.8% in Fiscal 1998 to 78.5% in Fiscal 1999. The dollar increase is due primarily to increases in underlying carrier and connectivity costs, as the Company's telecommunications minutes of use, and associated revenues, grew substantially. As a percentage of total revenues, the increase in direct costs reflects lower gross margins associated with wholesale carrier services and prepaid calling card services as compared with international retail and Internet access services. Gross margins were also adversely affected by network constraints as demand for usage outpaced the rate of deployment of additional network capacity. Selling, General and Administrative. Selling, general and administrative costs increased 107.3% from approximately $62.0 million in Fiscal 1998 to approximately $128.5 million in Fiscal 1999. As a percentage of total revenues, these costs decreased from 18.5% in Fiscal 1998 to 17.6% in Fiscal 1999. The increase in these costs in dollar terms is due primarily to increased sales and marketing efforts for retail services, including prepaid calling cards, domestic and international long distance, Net2Phone and Net2Phone Direct, as well as increased salaries, facilities costs and professional fees related to the expansion of the Company's infrastructure to handle its rapid sales growth. Included in salaries is $16.0 million of non- cash compensation as a result of option grants made by our majority-owned Net2Phone subsidiary in the fourth quarter of Fiscal 1999. Depreciation and Amortization. Depreciation and amortization costs increased 131.6% from approximately $11.3 million in Fiscal 1998 to approximately $26.3 million in Fiscal 1999. As a percentage of revenues, these costs increased from 3.4% in Fiscal 1998 to 3.6% in Fiscal 1999. These costs increased in 39 absolute terms primarily as a result of the Company's higher fixed asset base during Fiscal 1999 as compared with Fiscal 1998 reflecting the Company's efforts to expand its telecommunications network infrastructure, enhance its Internet network and expand its facilities. The Company anticipates that depreciation and amortization costs will continue to increase as the Company continues to add to its asset base allowing it to implement its growth strategy. Income (loss) from Operations. The Company's income from operations was $2.4 million in Fiscal 1999 compared to a loss from operations of $3.7 million in Fiscal 1998. Income from operations for the Company's telecommunications business increased to approximately $35.0 million in Fiscal 1999 from $5.9 million in Fiscal 1998. The Company's loss from operations in Fiscal 1998 includes a one-time charge of $25.0 million as a write-off of purchased in- process research and development costs in connection with the Company's acquisition of InterExchange. As a percentage of telecommunication revenues, income from operations for the telecommunications business increased to 5.1% in Fiscal 1999 from approximately 2.0% in Fiscal 1998. Fiscal 1998 income from telecommunications operations excluding the one-time purchased in-process research and development write-off, was approximately $30.9 million, which is 10.2% of telecommunications revenues. Loss from operations for the Company's Internet access business increased to approximately $8.2 million in Fiscal 1999 from approximately $7.0 million in Fiscal 1998. The increased loss is primarily due to decreased revenues resulting from a decrease in total dial-up subscribers. Loss from operations of the majority owned Net2Phone subsidiary increased to approximately $24.4 million for Fiscal 1999, compared to a loss of approximately $2.7 million for Fiscal 1998. This increase is due primarily to the non-cash compensation charge of $16.0 million described above, coupled with a substantial increase in both sales and marketing expenses as well as general and administrative expenses incurred as Net2Phone expanded distribution relationships, corporate infrastructure and human resources. Income Taxes. The Company recorded income tax expense of $17.9 million attributable to continuing operations in Fiscal 1999. An income tax benefit of $4.3 million upon the exercise of stock options was recorded directly into additional paid-in capital in Fiscal 1999. In Fiscal 1998, the Company recorded an income tax benefit of $1.9 million from the reversal of the previously established deferred tax valuation allowance. The allowance was reversed as the realization of the net deferred tax asset was more likely than not. A portion of the benefit that related to the tax deduction upon the exercise of stock options was recorded directly into additional paid in capital. Acquired Research and Development. The Company did not incur any expense related to acquired research and development during Fiscal 1999. The Company's statement of operations for Fiscal 1998 reflects a non-recurring charge of $25.0 million, representing the portion of the purchase price paid for InterExchange allocated to the in-process research and development of alternative switching and compression technologies. Subsidiary Redeemable Preferred Stock Dividends. On May 13, 1999, Net2Phone designated 3,150,000 shares of its preferred stock as Series A ("Series A Stock") and sold 3,140,000 of such shares to unrelated third parties in a private placement transaction for aggregate gross proceeds of $31,400,000. The Series A Stock contained beneficial conversion features. The total value of the beneficial conversion features approximated $75 million. For accounting purposes the value of the beneficial conversion features was limited to the amount of proceeds allocated to the Series A Stock. The Company recorded an increase in net loss available to common stockholders on the date of issuance of the Series A Stock in the amount of approximately $26.3 million representing their allocable share of the amount attributable to the beneficial conversion feature. Each share of Series A Stock was converted into three shares of Net2Phone Class A Common Stock at the time of Net2Phone's Initial Public Offering. 40 Fiscal 1998 Compared to Fiscal 1997 Revenues. Revenues increased 148.1% from approximately $135.2 million in Fiscal 1997 to approximately $335.4 million in Fiscal 1998. Telecommunications revenues increased 204.0% from approximately $99.9 million in Fiscal 1997 to approximately $303.9 million in Fiscal 1998. Internet access revenues decreased 39.2% from approximately $32.9 million in Fiscal 1997 to approximately $20.0 million in Fiscal 1998, reflecting the Company's decision in Fiscal 1997 to de-emphasize its activities in this area. Internet telephony revenues increased 388.6% from approximately $2.4 million in Fiscal 1997 to approximately $11.5 million in Fiscal 1998. Telecommunications revenues increased 204.0%, primarily as a result of a 244.7% increase in minutes of use, from approximately 233.8 million to approximately 805.8 million, offset in part by a decline in revenue per minute from $0.43 to $0.38. Telecommunications minutes increased primarily due to the addition of wholesale carrier service clients, increased usage by existing clients, and increased marketing and sales of the Company's prepaid calling cards. The offsetting decline in revenue per minute resulted from variations in the mix of telecommunications revenue. The addition of wholesale carrier services clients and the increased use by existing clients resulted in an increase in wholesale carrier services revenues of 157.8%, from approximately $64.7 million in Fiscal 1997 to approximately $166.7 million in Fiscal 1998. As a percentage of telecommunications revenues, wholesale carrier service revenues decreased from approximately 64.8% to 54.9%, primarily due to the significant increase in prepaid calling card revenues both in real dollars and as a percentage of overall telecommunications revenues. Revenues from sales of the Company's prepaid calling cards, which the Company began to market in January 1997, increased from approximately $2.6 million in Fiscal 1997 to approximately $108.1 million in Fiscal 1998. As a percentage of telecommunications revenues, prepaid calling card revenues increased from approximately 2.6% to approximately 35.6%. As a percentage of telecommunications revenues, international retail services revenues decreased from 27.3% to 7.5%. As a percentage of total revenues, Internet access revenues decreased from approximately 24.3% for Fiscal 1997 to approximately 6.0% for Fiscal 1998. This decrease was due to the substantial increase in telecommunications revenues as a percentage of total revenues, as well as a dollar decrease in Internet access revenues due to a decrease in total dial-up subscribers. Internet telephony revenues as a percentage of total revenues increased from 1.7% for Fiscal 1997 to 3.4% for Fiscal 1998. The increase in Internet telephony revenues was primarily due to an increase in billed-minute usage, and the sale of $1.5 million of equipment during Fiscal 1998. Direct Cost of Revenues. The Company's direct cost of revenues increased by 161.2% from approximately $92.2 million in Fiscal 1997 to approximately $240.9 million in Fiscal 1998. As a percentage of total revenues, these costs increased from 68.2% in Fiscal 1997 to 71.8% in Fiscal 1998. The dollar increase is due primarily to increases in underlying carrier costs as the Company's telecommunications minutes of use, and associated revenue, grew substantially. As a percentage of total revenues, the increase in direct costs reflects lower gross margins associated with wholesale carrier services as compared with international retail and Internet access services. Selling, General and Administrative. Selling, general and administrative costs increased 49.0% from approximately $41.5 million in Fiscal 1997 to approximately $62.0 million in Fiscal 1998. As a percentage of total revenues, these costs decreased from 30.7% in Fiscal 1997 to 18.5% in Fiscal 1998. The increase in these costs in dollar terms is primarily due to increased sales and marketing efforts for retail services, specifically pre-paid calling cards for the periods prior to the purchase of Union Telecard Alliance, LLC. As a percentage of total revenues, the decrease was primarily due to the substantial increase in total revenues for Fiscal 1998. Depreciation and Amortization. Depreciation and amortization costs increased 131.7% from approximately $4.9 million in Fiscal 1997 to approximately $11.3 million in Fiscal 1998. As a percentage of revenues, these costs decreased from 3.6% in Fiscal 1997 to 3.4% in Fiscal 1998. These costs increased in absolute terms primarily as a result of the Company's higher fixed asset base during Fiscal 1998 as compared with Fiscal 1997 due to the Company's efforts to expand its telecommunications network infrastructure, enhance its Internet network and expand its facilities. The Company anticipates that depreciation and amortization costs will continue to increase as the Company continues to implement its growth strategy. 41 Income (loss) from Operations. The Company's loss from operations increased 8.7% from $3.4 million in Fiscal 1997 to $3.7 million in Fiscal 1998. Income from operations for the Company's telecommunications business increased to approximately $5.9 million in Fiscal 1998 from $5.7 million in Fiscal 1997. The Company's loss from operations in Fiscal 1998 includes a one-time charge of $25.0 million as a write-off of purchased in-process research and development costs in connection with the Company's acquisition of InterExchange. As a percentage of telecommunication revenues, income from operations for the telecommunications business decreased to 2.0% in Fiscal 1998 from approximately 5.7% in Fiscal 1997. Fiscal 1998 income from telecommunications operations excluding the one-time purchased in-process research and development write-off, was approximately $30.9 million, which is 10.2% of telecommunications revenues. Loss from operations for the Company's Internet access business decreased to approximately $7.0 million in Fiscal 1998 from approximately $8.1 million in Fiscal 1997. The decreased loss of the Internet access segment is largely due to the refocusing of the Company's marketing efforts from aggressive mass marketing to new reseller programs. Loss from operations of the Net2Phone division increased to approximately $2.7 million for Fiscal 1998, compared to a loss of approximately $1.1 million for Fiscal 1997. This change is due to the substantial increase in marketing costs as the Company seeks to gain market share for its Internet telephony products and services and expand its infrastructure. Income Taxes. In the fourth quarter of Fiscal 1998, the Company recorded an income tax benefit from the reversal of the previously established deferred tax valuation allowance. The allowance was reversed as the realization of the net deferred tax asset was more likely than not. A portion of the benefit that related to the tax deduction upon the exercise of stock options was recorded directly into additional paid in capital. Acquired Research and Development. In May 1998, the Company completed its acquisition of InterExchange. The Company's statement of operations for Fiscal 1998 reflects a non-recurring charge of $25.0 million, representing the portion of the purchase price paid for InterExchange allocated to the in- process research and development of alternative switching and compression technologies. In order to determine the amount of this charge, the Company allocated the excess purchase price over the fair value of InterExchange's net tangible assets acquired to identified intangible assets. In performing this allocation, the Company considered, among other factors, the research and development projects in-process as of the date of acquisition. 42 Quarterly Results of Operations The following tables set forth certain quarterly financial data for the eight quarters ended July 31, 1999. This quarterly information is unaudited, has been prepared on the same basis as the annual financial statements and, in the opinion of the Company's management, reflects all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the information for periods presented. Operating results for any quarter are not necessarily indicative of results for any future period. IDT CORPORATION CONSOLIDATED QUARTERLY INCOME STATEMENTS (in thousands, except per share data)
Oct. 31, Jan. 31, April 30, July 31, Oct. 31, Jan. 31, April 30, July 31, 1997 1998 1998 1998 1998 1999 1999 1999 -------- -------- --------- -------- -------- -------- --------- -------- Revenues: Telecommunications..... $47,804 $63,050 $79,082 $113,928 $123,708 $149,239 $179,190 $232,435 Internet............... 4,850 5,194 5,211 4,746 4,269 4,312 4,217 4,136 Net2Phone.............. 2,097 2,709 2,819 3,883 5,301 7,190 8,344 9,843 ------- ------- ------- -------- -------- -------- -------- -------- Total revenues......... 54,751 70,953 87,112 122,557 133,278 160,741 191,751 246,414 Costs and expenses: Direct cost of revenues.............. 40,861 51,449 59,505 89,045 101,074 126,592 150,183 197,201 Selling, general and administrative........ 9,835 13,872 20,344 17,919 17,056 23,750 29,966 57,728 Acquired research and development........... -- -- -- 25,000 -- -- -- -- Depreciation and amortization.......... 1,745 2,042 2,765 4,737 5,439 6,296 6,902 7,617 ------- ------- ------- -------- -------- -------- -------- -------- Total costs and expenses.............. 52,441 67,363 82,614 136,701 123,569 156,638 187,051 262,546 ------- ------- ------- -------- -------- -------- -------- -------- Income (loss) from operations............. 2,310 3,590 4,498 (14,144) 9,709 4,103 4,700 (16,132) Other (net)............. (347) (436) 337 154 205 (62) (153) 18,358 ------- ------- ------- -------- -------- -------- -------- -------- Income (loss) before taxes, minority interests and extraordinary item..... 1,963 3,154 4,835 (13,990) 9,914 4,041 4,547 2,226 Income tax provision (benefit).............. -- -- -- (1,671) 3,399 1,426 2,071 10,954 Minority interests...... -- -- -- 3,896 1,623 562 420 (5,914) ------- ------- ------- -------- -------- -------- -------- -------- Income (loss) before extraordinary item..... 1,963 3,154 4,835 (16,215) 4,892 2,053 2,056 (2,814) Extraordinary item, net of income taxes........ -- -- -- (132) -- -- -- (3,270) ------- ------- ------- -------- -------- -------- -------- -------- Net income (loss)....... 1,963 3,154 4,835 (16,347) 4,892 2,053 2,056 (6,084) Subsidiary redeemable preferred stock dividends.............. -- -- -- -- -- -- -- 26,298 ------- ------- ------- -------- -------- -------- -------- -------- Net income (loss) available to common stockholders........... $ 1,963 $ 3,154 $ 4,835 $(16,347) $ 4,892 $ 2,053 $ 2,056 $(32,382) ======= ======= ======= ======== ======== ======== ======== ======== Net income (loss) per share--basic........... $ 0.09 $ 0.14 $ 0.17 $ (0.51) $ 0.15 $ 0.06 $ 0.06 $ (0.96) ======= ======= ======= ======== ======== ======== ======== ======== Weighted average shares outstanding--basic..... 21,999 23,330 28,881 32,359 33,200 33,332 33,649 33,919 ======= ======= ======= ======== ======== ======== ======== ======== Net income (loss) per share--diluted......... $ 0.08 $ 0.12 $ 0.15 $ (0.51) $ 0.14 $ 0.06 $ 0.06 $ (0.96) ======= ======= ======= ======== ======== ======== ======== ======== Weighted average shares outstanding--diluted... 25,480 27,054 32,693 32,359 35,702 35,344 35,731 33,919 ======= ======= ======= ======== ======== ======== ======== ========
43 Liquidity and Capital Resources General Historically, the Company has satisfied its cash requirements through a combination of cash flow from operating activities, sales of equity and debt securities and borrowings from third parties. The Company received approximately $10.7 million upon the exercise of stock options and warrants in Fiscal 1999. In May 1999, The Company entered into a credit agreement with Lehman Commercial Paper Inc., CIBC World Markets Corp., Bankers Trust Company and a Syndicate of lenders. These institutions have provided us with a $160 million credit facility that includes term loans in an aggregate amount of up to $135 million and revolving loans in an amount of up to $25 million and an additional uncommitted amount of up to $100 million. Bankers Trust Company serves as administrative agent for the facility. The Company used the proceeds from the initial borrowings under the credit facility of $108.1 million to purchase more than 99% of its outstanding 8.75% Senior Notes due 2006, together with accrued and unpaid interest, that were tendered in connection with its tender offer for these securities. The amount of $75.0 million of the initial borrowings currently bears interest at a rate of 8.75% per annum and the remaining $33.1 million of the initial borrowings currently bears interest at a rate of 8.25% per annum. As of July 31, 1999, the Company had cash, cash equivalents and marketable securities of $130.8 million and working capital of approximately $179.4 million. The Company generated negative cash flow from operating activities of approximately $18.3 million during Fiscal 1999, compared with positive cash flow from operating activities of approximately $30.6 million during Fiscal 1998. The Company's cash flow from operations varies significantly from year to year, depending upon the timing of operating cash receipts and payments, especially accounts receivable and accounts payable. Accounts receivable (net of allowances) were approximately $38.0 million and $106.1 million at July 31, 1998 and July 31, 1999, respectively. Accounts receivable, accounts payable and accrued expenses have increased from period to period as the Company's businesses have grown. The Company's capital expenditures increased from approximately $59.3 million in Fiscal 1998 to approximately $60.0 million in Fiscal 1999, as the Company expanded its international and domestic telecommunications network infrastructure. The Company financed a portion of its capital expenditures through capital leases and notes payable. The Company experiences intense competition in its telecommunications business. The long distance telecommunications industry has been characterized by declines in both per-minute revenues and per-minute costs. In the past, these factors have tended to generally offset each other. However, as per- minute pricing continues to erode, gross margins could come under increasing pressure. The Company's long-term strategy involves terminating a larger proportion of minutes on the Company's own network, thus lowering costs and preserving margins even in a weaker price environment. However, in the short term, the demand for usage might outpace the rate of deployment of additional network capacity. As such, there can be no assurance that the Company will be able to maintain its gross margins at the current level, in the face of lower per-minute revenues. In addition, the Company will need to make significant capital expenditures in order to expand its network capacity. If the Company is unable to raise sufficient capital to meet its spending requirements, the Company's network expansion, and the associated margin improvement, would be delayed. Net2Phone Financings In May 1999, a group of strategic investors purchased from Net2Phone, in the aggregate, 3,140,000 shares of Net2Phone Series A Preferred Stock convertible into 9,420,000 shares of common stock and warrants to purchase up to 180,000 shares of Net2Phone common stock, for a net aggregate purchase price of $29.9 million. Additionally, Net2Phone issued a warrant to purchase 92,400 shares of its common stock to Hambrecht & Quist as part of its fee as placement agent with respect to this transaction. In August 1999, Net2Phone completed its Initial Public Offering of 6.2 million shares, receiving approximately $85.3 million in net proceeds. At that time the Series A Preferred Stock was converted into Class A Common Stock. The Company owned 56.2% of the capital stock of Net2Phone after the Initial Public Offering. 44 Other Sources and Uses of Resources The Company intends to, where appropriate, make strategic acquisitions to increase its telecommunications customer base. Net2Phone may also make strategic acquisitions related to its Internet telephony business. From time to time, the Company evaluates potential acquisitions of companies, technologies, products and customer accounts that complement its businesses. As of July 31, 1999, the Company had made loans and advances in the aggregate amount of approximately $34.5 million, of which $21.2 million was still outstanding as of July 31, 1999, to other telecommunications and Internet companies to help establish strategic relationships and facilitate penetration into key markets. Of that amount $20.0 million had been repaid as of October 28, 1999, including the entire outstanding balance of a loan made to Lermer Overseas Telecommunications, Inc. The Company may be a party to similar transactions in the future. The Company believes that, based upon its present business plan, the Company's existing cash resources, and expected cash flow from operating activities and borrowings under its credit facility, will be sufficient to meet its currently anticipated working capital and capital expenditure requirements for at least the next twelve months. If the Company's growth exceeds current expectations or if the Company acquires the business or assets of another company, or if the Company's cash flow from operations after the end of such period is insufficient to meet its working capital and capital expenditure requirements, the Company will need to raise additional capital from equity or debt sources. There can be no assurance that the Company will be able to raise such capital on favorable terms or at all. If the Company is unable to obtain such additional capital, the Company may be required to reduce the scope of its anticipated expansion, which could have a material adverse effect on the Company's business, financial condition or results of operations. Year 2000 The Year 2000 issue affects Company's installed computer systems, network systems and software applications due to the fact that many computers and applications define dates by the last two digits of the year and "00" may not be properly recognized by such programs as the Year 2000. The Company has dedicated the resources it deems appropriate to address and correct potential Year 2000 problems. The Company has established a Year 2000 compliance committee (the "Committee"). The Committee's objectives are to eliminate any possible disruptions in services and operations that may result from the date change in the Year 2000. The Committee has developed a plan to identify and repair any systems that may be affected by the Year 2000. The plan consists of (1) identifying and inventorying all systems; (2) assessing and testing the systems for Year 2000 compliance; (3) modifying, upgrading or replacing any non-compliant systems; and (4) testing the corrected systems to ensure compliance. The Committee has implemented this plan throughout the Company and, in addition to reviewing its own systems, the Company has initiated inquiries and submitted requests to its third-party vendors and service providers to obtain information regarding their compliance with the Year 2000. Inventory, assessment, remediation and testing of software applications and hardware systems, including network systems, is substantially complete. The Company will complete the modification, updating or replacement of any systems that to its knowledge are not Year 2000 compliant by the end of November 1999. Testing of the corrected systems has been implemented and will continue on an ongoing basis through October 2000 due to the date October 10, 2000, which is the first occurrence of a date requiring the use of eight digits to define the date. Additional testing will be conducted, as deemed necessary by management. In particular, the Company has focused on the testing and remediation of its switching facilities to ensure that its network operations through which it provides communications services to its customers are not disrupted by the Year 2000. The Company believes that its own network systems are Year 2000 compliant due to the nature and extent of the testing the Company has conducted and continues to implement on such systems. The greatest risk to the Company's ability to provide communications services is the failure of third party service providers to be Year 2000 compliant. While many other carriers and Internet providers have plans to 45 independently become Year 2000 compliant, there is the risk that some (particularly smaller carriers and providers) will not address or properly resolve Year 2000 issues. If this were to occur, the Company would be affected only to the same degree as other carriers and Internet providers in the communications industry. In providing telecommunications services, the Company connects directly and indirectly with thousands of other carriers through switches of the Company and other carriers. The Company has obtained written assurances and information from its primary vendors and providers regarding their year 2000 compliance and, to the best of the Company's knowledge based on such assurances and information, the Company believes there is not a significant risk that the Company's provision of telecommunication services will be materially impacted. In addition, it is unlikely that a network failure of a smaller carrier would have a significant impact on the Company's ability to provide telecommunications services, however, fully addressing any of these risks is beyond the Company's control. In addition, the Company is unable to fully assess the degree to which the manufacturers of switches and similar equipment have assessed and remediated their equipment and software since most are manufactured and maintained by independent third parties. However, most switches are manufactured by manufacturers with a wide range of customers, therefore, such manufacturers would have a vested interest in ensuring Year 2000 compliance and prompt remediation of any Year 2000 issues. To date, the Company has incurred expenses of less than $1.0 million in connection with its remediation of Year 2000 related issues. The Company constantly monitors its progress of the Year 2000 plan and anticipates that it will resolve any outstanding internal issues before the end of 1999. Contingency plans will be developed and implemented before the end of 1999 for critical systems on an as needed basis should the Company identify any areas for which such plans are appropriate. European Currency Conversion In January 1999, a new currency called the "euro" was introduced in certain Economic and Monetary Union ("EMU") countries. The EMU countries adopted the euro as their common legal currency, and through January 1, 2002, both the existing national currency of the respective EMU country and the euro will be accepted as legal currency. Beginning in 2002, all EMU countries are expected to operate with the euro as their single currency. Uncertainty exists as to the effect the euro currency will have on the market for international telecommunications services. Additionally, all of the final rules and regulations have not yet been defined and finalized by the European Commission with regard to the euro currency. IDT's management does not anticipate, based on currently available information, that the euro will have a material adverse impact on the Company's operations and sales. Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS. The information set forth under the caption "Fair Value of Financial Instruments" at page F-9 herein is incorporated herein by reference. Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The consolidated financial statements and supplementary data of the Company and the report of independent auditors thereon set forth on pages F-1 through F-24 herein are incorporated herein by reference. Quarterly financial information set forth herein at page 41 is incorporated herein by reference. Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. 46 PART III Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. The information required by this Item will be contained in the Company's Proxy Statement for its Annual Stockholders Meeting, which will be filed with the Securities and Exchange Commission within 120 days after July 31, 1999, and which is incorporated by reference herein. Item 11. EXECUTIVE COMPENSATION. The information required by this Item will be contained in the Company's Proxy Statement for its Annual Stockholders Meeting, which will be filed with the Securities and Exchange Commission within 120 days after July 31, 1999, and which, with the exception of the sections entitled "Report of the Compensation Committee of the Board of Directors" and "Performance Graph of Common Stock," is incorporated by reference herein. Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The information required by this Item will be contained in the Company's Proxy Statement for its Annual Stockholders Meeting, which will be filed with the Securities and Exchange Commission within 120 days after July 31, 1999, and which is incorporated by reference herein. Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The information required by this Item will be contained in the Company's Proxy Statement for its Annual Stockholders Meeting, which will be filed with the Securities and Exchange Commission within 120 days after July 31, 1999, and which is incorporated by reference herein. 47 PART IV Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. (a) The following documents are filed as part of this Report: 1. Financial Statements. 2. Financial Statement Schedules. Schedule No. Description ------------ ----------- I. Valuation and Qualifying Accounts 3. Exhibits Exhibit Number Description ------- ----------- 3.01(1) Restated Certificate of Incorporation of the Registrant. 3.02(1) By-laws of the Registrant. 10.01(2) Employment Agreement between the Registrant and Howard S. Jonas. 1996 Stock Option and Incentive Plan, as amended and restated, of 10.02(10) the Registrant. Form of Stock Option Agreement under the 1996 Stock Option and 10.03(3) Incentive Plan. Form of Registration Rights Agreement between certain stockholders 10.04(4) and the Registrant. 10.05(1) Lease of 294 State Street. 10.06(5) Lease of 190 Main Street. Form of Registration Rights Agreement between Howard S. Jonas and 10.7(6) the Registrant. 10.8(11) Employment Agreement between the Registrant and James Courter. 10.9(7) Agreement between Cliff Sobel and the Registrant. 10.10(11) Employment Agreement between the Registrant and Hal Brecher. 10.11(11) Employment Agreement between the Registrant and Howard S. Jonas. 10.12(8) Agreement and Plan of Merger, dated April 7, 1998, by and among the Registrant, ADM Corp., InterExchange, Inc., David Turock, Eric Hecht, Richard Robbins, Bradley Turock, Wai Nam Tam, Mary Jo Altom and Lisa Mikulynec. 10.13(9) Securities Purchase Agreement between the Registrant, Carlos Gomez and Union Telecard Alliance, LLC. 10.14(11) Credit Agreement, dated as of May 10, 1999, by and among the Registrant, various lenders party thereto, Lehman Commercial Paper Inc., CIBC World Markets Corp. and Bankers Trust Company. 10.15(11) Pledge Agreement, dated as of May 10, 1999, by and among the Registrant, certain subsidiaries of the Registrant and Bankers Trust Company, as Collateral Agent. 10.16(11) Security Agreement, dated as of May 10, 1999, by and among the Registrant, certain subsidiaries of the Registrant and Bankers Trust Company, as Collateral Agent. 10.17(11) Subsidiaries Guaranty, dated as of May 10, 1999, by and among the Registrant, certain subsidiaries of the Registrant and Bankers Trust Company, as Collateral Agent. 10.18(11) Loan Agreement between the Registrant and Stephen Brown. 10.19* Internet/Telecommunications Agreement, dated as of May 7, 1999, by and between Registrant and Net2Phone, Inc. 10.20* Joint Marketing Agreement, dated as of May 7, 1999, by and between Registrant and Net2Phone, Inc. 10.21* IDT Services Agreement, dated as of May 7, 1999, by and between Registrant and Net2Phone, Inc. 10.22* Net2Phone Services Agreement, dated as of May 7, 1999, by and between Registrant and Net2Phone, Inc. 10.23* Assignment Agreement, dated as of May 7, 1999, by and between Registrant and Net2Phone, Inc. 48
Exhibit Number Description ------- ----------- 10.24* Tax Sharing and Indemnification Agreement, dated as of May 7, 1999, by and between Registrant and Net2Phone, Inc. 10.25* Separation Agreement, dated as of May 7, 1999, by and between Registrant and Net2Phone, Inc. 10.26* Co-location and Facilities Management Services Agreement, dated as of May 20, 1999, by and between Registrant and Net2Phone, Inc. 21.01* Subsidiaries of the Registrant 23.01* Consent of Ernst & Young LLP. 27.01* Financial Data Schedule.
- -------- * filed herewith (1) Incorporated by reference to Form S-1 filed February 21, 1996 file no. 333-00204. (2) Incorporated by reference to Form S-1 filed January 9, 1996 file no. 333- 00204. (3) Incorporated by reference to Form S-8 filed January 14, 1996 file no. 333-19727. (4) Incorporated by reference to Form S-1 filed March 8, 1996 file no. 333- 00204. (5) Incorporated by reference to Form 10-K for the fiscal year ended July 31, 1997, filed October 29, 1997. (6) Incorporated by reference to Form S-1 filed March 14, 1996 file no. 333- 00204. (7) Incorporated by reference to Form 10-K/A for the fiscal year ended July 31, 1997, filed February 2, 1998. (8) Incorporated by reference to Form 8-K filed April 22, 1998. (9) Incorporated by reference to Form 10-K/A for the fiscal year ended July 31, 1998, filed December 4, 1998. (10) Incorporated by reference to Form 10-Q for the fiscal quarter ended January 31, 1999, filed March 17, 1999. (11) Incorporated by reference to Form 10-Q for the fiscal quarter ended April 30, 1999, filed June 14, 1999. (b) Reports on Form 8-K. The Registrant filed the following Current Reports on Form 8-K during the fiscal year ended July 31, 1999: On September 29, 1998, the Registrant filed a Current Report on Form 8-K to amend and refile Exhibit 23.1 to Amendment No. 1 to the Registrant's Current Report on Form 8-K which was filed with the Commission on May 26, 1998. 49 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized. IDT Corporation By: /s/ Howard S. Jonas ---------------------------------- Howard S. Jonas Chairman, Chief Executive Officer and Treasurer Date: November 4, 1999 Pursuant to the requirements of the Securities Act of 1933, this Annual Report on Form 10-K has been signed by the following persons on this 4th day of November 1999 in the capacities and on the dates indicated.
Signature Titles --------- ------ /s/ Howard S. Jonas Chairman and Chief ______________________________________ Executive Officer Howard S. Jonas (Principal Executive Officer) /s/ James A. Courter President and Director ______________________________________ James A. Courter /s/ Hal Brecher Chief Operating Officer ______________________________________ and Director Hal Brecher /s/ Stephen R. Brown Chief Financial Officer ______________________________________ (Principal Accounting Stephen R. Brown Officer) /s/ Moshe Kaganoff Director ______________________________________ Moshe Kaganoff /s/ Marc E. Knoller Director ______________________________________ Marc E. Knoller /s/ Joyce J. Mason Director ______________________________________ Joyce J. Mason /s/ Geoffrey Rochwarger Director ______________________________________ Geoffrey Rochwarger /s/ Meyer A. Berman Director ______________________________________ Meyer A. Berman
50
Signature Titles --------- ------ /s/ J. Warren Blaker Director ______________________________________ J. Warren Blaker /s/ Denis A. Bovin Director ______________________________________ Denis A. Bovin /s/ Irving Goldstein Director ______________________________________ Irving Goldstein Director ______________________________________ Elmo R. Zumwalt
51 IDT CORPORATION INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Report of Independent Auditors........................................... F-2 Consolidated Balance Sheets as of July 31, 1998 and 1999................. F-3 Consolidated Statements of Operations for the years ended July 31, 1997, 1998 and 1999........................................................... F-4 Consolidated Statements of Stockholders' Equity for the years ended July 31, 1997, 1998 and 1999................................................. F-5 Consolidated Statements of Cash Flows for the years ended July 31, 1997, 1998 and 1999........................................................... F-6 Notes to Consolidated Financial Statements............................... F-7 Financial Statement Schedule--Valuation and Qualifying Accounts.......... F-24
F-1 REPORT OF INDEPENDENT AUDITORS The Board of Directors and Stockholders IDT Corporation We have audited the accompanying consolidated balance sheets of IDT Corporation (the "Company") as of July 31, 1998 and 1999, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended July 31, 1999. Our audits also included the financial statement schedule listed in the Index at Item 14(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company at July 31, 1998 and 1999 and the consolidated results of its operations and its cash flows for each of the three years in the period ended July 31, 1999, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. ERNST & YOUNG LLP New York, New York October 1, 1999 F-2 IDT CORPORATION CONSOLIDATED BALANCE SHEETS
July 31 -------------------------- 1998 1999 ------------ ------------ Assets Current assets: Cash and cash equivalents........................ $115,283,519 $ 52,903,479 Marketable securities............................ 60,308,768 77,869,655 Trade accounts and commissions receivable, net of allowance for doubtful accounts of approximately $6,255,000 at July 31, 1998 and $7,643,000 at July 31, 1999................................... 38,037,974 106,146,127 Notes receivable--current portion................ 2,140,000 18,967,967 Other current assets............................. 12,096,803 36,311,052 ------------ ------------ Total current assets........................... 227,867,064 292,198,280 Property, plant and equipment, at cost, net........ 75,332,476 114,122,923 Trademark, net..................................... -- 4,791,667 Notes receivable--long-term portion................ 21,767,769 2,187,071 Goodwill, net...................................... 74,222,221 74,880,499 Deferred tax assets, net........................... 10,750,000 1,309,000 Other assets....................................... 7,256,674 25,846,814 ------------ ------------ Total assets................................... $417,196,204 $515,336,254 ============ ============ Liabilities and stockholders' equity Current liabilities: Trade accounts payable........................... $ 38,793,873 $ 79,475,136 Accrued expenses................................. 3,499,301 5,354,710 Interest payable................................. 3,942,577 1,564,741 Deferred revenue................................. 9,175,218 13,209,663 Notes payable--current portion................... 1,865,849 4,752,780 Capital lease obligations--current portion....... 3,989,375 6,029,273 Other current liabilities........................ 220,325 2,397,234 ------------ ------------ Total current liabilities...................... 61,486,518 112,783,537 Notes payable--long-term portion................... 101,833,892 112,973,330 Capital lease obligations--long-term portion....... 11,232,053 15,742,218 ------------ ------------ Total liabilities.............................. 174,552,463 241,499,085 Minority interests................................. 3,895,669 20,431,834 Commitments and contingencies Stockholders' equity: Preferred stock, $.01 par value; authorized shares--10,000,000; no shares issued............ -- -- Common stock, $.01 par value; authorized shares-- 100,000,000; 22,848,866 and 23,982,854 shares issued and outstanding in 1998 and 1999, respectively.................................... 228,489 239,829 Class A stock, $.01 par value; authorized shares--35,000,000; 10,255,668 and 10,029,758 shares issued and outstanding in 1998 and 1999, respectively.................................... 102,557 100,298 Loans to stockholders............................ -- (251,207) Additional paid-in capital....................... 266,761,770 278,744,508 Accumulated deficit.............................. (28,344,744) (25,428,093) ------------ ------------ Total stockholders' equity..................... 238,748,072 253,405,335 ------------ ------------ Total liabilities and stockholders' equity..... $417,196,204 $515,336,254 ============ ============
See accompanying notes. F-3 IDT CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended July 31 ---------------------------------------- 1997 1998 1999 ------------ ------------ ------------ Revenue............................. $135,187,227 $335,372,915 $732,183,855 Costs and expenses: Direct cost of revenue............ 92,214,223 240,859,809 575,049,683 Selling, general and administrative................... 41,544,987 61,974,851 128,499,715 Acquired research and development...................... -- 25,000,000 -- Depreciation and amortization..... 4,873,142 11,284,013 26,254,086 ------------ ------------ ------------ Total costs and expenses............ 138,632,352 339,118,673 729,803,484 ------------ ------------ ------------ Income (loss) from operations....... (3,445,125) (3,745,758) 2,380,371 Interest expense.................... (862,954) (5,978,760) (11,318,964) Interest income..................... 436,112 5,582,951 10,090,332 Other............................... 35,197 103,215 19,576,147 ------------ ------------ ------------ Income (loss) before income taxes, minority interests and extraordinary items................ (3,836,770) (4,038,352) 20,727,886 Provision (benefit) for income taxes.............................. -- (1,671,000) 17,850,000 Minority interests.................. -- 3,895,669 (3,308,552) ------------ ------------ ------------ Income (loss) before extraordinary items.............................. (3,836,770) (6,263,021) 6,186,438 Extraordinary loss on retirement of debt, net of income taxes.......... -- (132,376) (3,269,787) ------------ ------------ ------------ Net income (loss)................... (3,836,770) (6,395,397) 2,916,651 Subsidiary redeemable preferred stock dividends.................... -- -- 26,297,426 ------------ ------------ ------------ Net loss available to common stockholders....................... $ (3,836,770) $ (6,395,397) $(23,380,775) ============ ============ ============ Loss per share: Loss before extraordinary items: Basic and diluted................. $ (0.18) $ (0.21) $ (0.60) Extraordinary loss on retirement of debt, net of income taxes: Basic and diluted................. $ -- $ (0.01) $ (0.10) ------------ ------------ ------------ Net loss............................ $ (0.18) $ (0.22) $ (0.70) ============ ============ ============ Weighted average number of shares used in calculation of basic loss per share.......................... 21,152,927 28,571,421 33,529,930 ============ ============ ============
See accompanying notes. F-4 IDT CORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Common Stock Class A Stock Additional Total ------------------- -------------------- Paid-In Loans to Accumulated Stockholders' Shares Amount Shares Amount Capital Stockholders Deficit Equity ---------- -------- ---------- -------- ------------ ------------ ------------ ------------- Balance at July 31, 1996................... 9,666,900 $ 96,669 11,174,330 $111,743 $ 44,746,841 $ -- $(18,112,577) $ 26,842,676 Compensation expense recognized on issuance of stock options...... -- -- -- -- 41,213 -- -- 41,213 Exercise of stock options............... 969,100 9,691 -- -- 2,202,334 -- -- 2,212,025 Net loss for the year ended July 31, 1997... -- -- -- -- -- -- (3,836,770) (3,836,770) ---------- -------- ---------- -------- ------------ --------- ------------ ------------ Balance at July 31, 1997................... 10,636,000 106,360 11,174,330 111,743 46,990,388 -- (21,949,347) 25,259,144 Exercise of stock options............... 1,615,366 16,154 -- -- 5,281,017 -- -- 5,297,171 Income tax benefit from stock options exercised............. -- -- -- -- 8,790,000 -- -- 8,790,000 Conversion of Class A stock to common stock................. 918,662 9,186 (918,662) (9,186) -- -- -- -- Issuance of common stock in connection with business acquisitions.......... 3,967,323 39,673 -- -- 77,922,827 -- -- 77,962,500 Common stock issued upon conversion of notes payable......... 582,762 5,828 -- -- 8,648,685 -- -- 8,654,513 Exercise of warrants... 35,003 350 -- -- 530,258 -- -- 530,608 Sale of common stock... 5,093,750 50,938 -- -- 118,208,595 -- -- 118,259,533 Issuance of common stock to employees by related party......... -- -- -- -- 390,000 -- -- 390,000 Net loss for the year ended July 31, 1998... -- -- -- -- -- -- (6,395,397) (6,395,397) ---------- -------- ---------- -------- ------------ --------- ------------ ------------ Balance at July 31, 1998................... 22,848,866 228,489 10,255,668 102,557 266,761,770 -- (28,344,744) 238,748,072 Exercise of stock options............... 696,840 6,968 -- -- 4,075,118 (251,207) -- 3,830,879 Income tax benefit from stock options exercised............. -- -- -- -- 4,257,973 -- -- 4,257,973 Conversion of Class A stock to common stock................. 225,910 2,259 (225,910) (2,259) -- -- -- -- Issuance of common stock in connection with business acquisitions.......... 100,000 1,000 -- -- 2,849,000 -- -- 2,850,000 Exercise of warrants... 111,238 1,113 -- -- 922,801 -- -- 923,914 Costs associated with stock registration.... -- -- -- -- (122,154) -- -- (122,154) Net income for the year ended July 31, 1999... -- -- -- -- -- -- 2,916,651 2,916,651 ---------- -------- ---------- -------- ------------ --------- ------------ ------------ Balance at July 31, 1999................... 23,982,854 $239,829 10,029,758 $100,298 $278,744,508 $(251,207) $(25,428,093) $253,405,335 ========== ======== ========== ======== ============ ========= ============ ============
See accompanying notes. F-5 IDT CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended July 31 ---------------------------------------- 1997 1998 1999 ----------- ------------- ------------ Operating activities Net income (loss).................... $(3,836,770) $ (6,395,397) $ 2,916,651 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Amortization........................ 97,056 1,570,176 5,047,868 Depreciation........................ 4,776,086 9,713,837 21,206,218 Extraordinary loss on retirement of debt before taxes.................. -- 132,376 5,359,787 Gain on sale of subsidiary stock.... -- -- (21,611,297) Amortization of deferred compensation....................... -- -- 15,734,418 Acquired research and development costs by issuance of common stock.. -- 25,000,000 -- Minority interests.................. -- 3,895,669 (3,308,552) Deferred income taxes............... -- (1,960,000) 9,441,000 Issuance of common stock to employees by related party......... -- 390,000 -- Changes in assets and liabilities: Accounts receivable................ (9,273,827) (20,909,084) (68,108,153) Other current assets............... (937,660) (9,138,112) (24,214,249) Other assets....................... (1,801,077) (1,359,248) (6,770,740) Notes receivable................... 2,861,003 485,810 -- Trade accounts payable............. 6,233,349 18,141,813 39,056,078 Accrued expenses................... (4,225,977) 878,017 1,290,649 Deferred revenue................... 1,459,352 6,732,370 4,034,445 Interest payable................... -- 4,063,120 (2,377,836) Other current liabilities.......... 173,946 (375,626) 2,176,909 Other.............................. 41,213 (262,376) 1,830,450 ----------- ------------- ------------ Net cash provided by (used in) operating activities................ (4,433,306) 30,603,345 (18,296,354) Investing activities Purchases of property, plant and equipment........................... (7,112,962) (41,332,835) (48,097,692) Purchase of trademark................ -- -- (5,000,000) Issuance of notes receivable......... -- (23,595,526) (13,423,462) Investments and acquisitions......... (2,133,157) -- (10,735,031) Collection of notes receivable....... -- -- 14,040,147 Payments for the purchase of InterExchange, Inc.................. -- (20,588,000) -- Net purchases of marketable securities.......................... -- (60,308,768) (17,560,887) ----------- ------------- ------------ Net cash used in investing activities.......................... (9,246,119) (145,825,129) (80,776,925) Financing activities Proceeds from issuance of Series A Preferred stock and warrants by Net2Phone........................... -- -- 29,900,000 Proceeds from exercise of stock options for Net2Phone............... -- -- 1,334,000 Proceeds from exercise of warrants for Net2Phone....................... -- -- 437,870 Payment of debt issuance costs....... -- -- (4,475,029) Distribution to minority shareholder......................... -- -- (6,079,274) Proceeds from borrowings............. 6,750,000 110,668,294 115,945,551 Payment of financing costs........... -- (3,561,070) -- Proceeds from exercise of warrants... -- 530,608 923,914 Proceeds from exercise of stock options............................. 2,212,025 5,297,171 7,966,698 Repayment of capital lease obligations......................... (684,070) (2,665,084) (5,348,909) Repayments of borrowings............. (1,817,973) (5,698,462) (103,911,582) Proceeds from sale of common stock... -- 118,259,533 -- ----------- ------------- ------------ Net cash provided by financing activities.......................... 6,459,982 222,830,990 36,693,239 ----------- ------------- ------------ Net increase (decrease) in cash...... (7,219,443) 107,609,206 (62,380,040) Cash and cash equivalents at beginning of period................. 14,893,756 7,674,313 115,283,519 ----------- ------------- ------------ Cash and cash equivalents at end of period.............................. $ 7,674,313 $ 115,283,519 $ 52,903,479 =========== ============= ============ Supplemental disclosure of cash flow information: Cash payments made for interest...... $ 863,000 $ 2,036,000 $ 13,483,000 =========== ============= ============ Cash payments made for income taxes.. $ -- $ -- $ 235,000 =========== ============= ============ Supplemental schedule of non-cash activities: Accrued interest converted to equity.............................. $ -- $ 121,000 $ -- =========== ============= ============ Purchase of fixed assets by capital lease............................... $ 6,122,000 $ 12,448,000 $ 11,899,000 =========== ============= ============ Notes payable converted to equity.... $ -- $ 8,534,000 $ -- =========== ============= ============
See accompanying notes. F-6 IDT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS July 31, 1999 1. Summary of Significant Accounting Policies Description of Business IDT Corporation ("IDT" or the "Company") is a multinational telecommunications carrier that provides a broad range of services to its wholesale and retail customers world wide. The Company provides its customers with integrated international and domestic long distance, pre-paid calling cards, Internet access, and through Net2Phone, Inc. ("Net2Phone"), a majority- owned subsidiary, Internet telephony services. The Company also sells pre-paid calling cards to distributors. Basis of Consolidation and Accounting for Investments The consolidated financial statements include the accounts of IDT and all companies in which IDT has a controlling voting interest ("subsidiaries"), as if IDT and its subsidiaries were a single company. Significant intercompany accounts and transactions between the consolidated companies have been eliminated. Investments in companies in which IDT has significant influence, but less than a controlling voting interest, are accounted for using the equity method. Investments in companies in which IDT does not have a controlling interest or an ownership and voting interest so large as to exert significant influence are accounted for at market value if the investments are publicly traded and there are no resale restrictions, or at cost, if the sale of a publicly-traded investment is restricted or if the investment is not publicly traded. The effect of any changes in IDT's ownership interests resulting from the issuance of equity capital by consolidated subsidiaries or equity investees to unaffiliated parties is included in other income. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results may differ from those estimates. Revenue Recognition Telecommunication, Internet telephony service, Internet subscription service and debit card revenues are recognized as service is provided. Equipment sales are recognized when installation is completed. Pre-payments for services are deferred and recognized as revenue as the services are provided. Direct Cost of Revenue Direct cost of revenue consists primarily of telecommunication costs, connectivity costs, and the cost of equipment sold to customers. Direct cost of revenue excludes depreciation and amortization. Property, Plant and Equipment Equipment and furniture and fixtures are depreciated using the straight-line method over the estimated useful lives of the assets, which range from three to seven years. Leasehold improvements are depreciated using the straight-line method over the term of the lease or estimated useful life of the assets, whichever is shorter. Computer software is amortized using the straight-line method over the shorter of five years or the term of the related agreement. Buildings are depreciated using the straight-line method over the estimated useful life of the assets of 30 years. Trademark Costs associated with obtaining the right to use trademarks owned by third parties are capitalized and amortized on a straight-line basis over the term of the trademark license. F-7 IDT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Subscriber Acquisition Costs and Advertising Subscriber acquisition costs including sales commissions, license fees and production and shipment of starter packages are expensed as incurred. The Company expenses the costs of advertising as incurred. Typically, Net2Phone purchases banner advertising on other companies' web sites pursuant to contracts which have one to three year terms and may include the guarantee of (i) a minimum number of impressions, (ii) the number of times that an advertisement appears in pages displayed to users of the web site, or (iii) a minimum amount of revenue that will be recognized by Net2Phone from customers directed to Net2Phone's web site as a direct result of the advertisement. Net2Phone recognizes expense with respect to such advertising ratably over the period in which the advertisement is displayed. In addition, some agreements require additional payments as additional impressions are delivered. Such payments are expensed when the impressions are delivered. In one case, Net2Phone entered into an agreement with no specified term of years. In this case, the Company amortizes as expense the lessor of (i) the number of impressions to date/minimum guaranteed impressions, or (ii) revenue to date/minimum guaranteed revenue as a percentage of the total payments. For the years ended July 31, 1997, 1998 and 1999, advertising expense totaled approximately $4,011,000, $5,632,000, and $10,454,000, respectively. Software Development Costs Costs for the internal development of new software products and substantial enhancements to existing software products are expensed as incurred until technological feasibility has been established, at which time any additional costs would be capitalized. To date, the Company has essentially completed its software development concurrently with the establishment of technological feasibility and, accordingly, it has commenced capitalizing these costs. Software development costs are the Company's only research and development expenditures. For the years ended July 31, 1997, 1998 and 1999, research and development costs totaled approximately $473,000, $481,000 and $757,000, respectively. Capitalized Internal Use Software Costs The Company capitalizes certain costs incurred in connection with developing or obtaining internal use software. These costs consist of payments made to third parties and the salaries of employees working on such software development. At July 31, 1998 and 1999, the Company has capitalized $2,198,000 and $4,065,000, respectively, of internal use software costs as computer software. Cash and Cash Equivalents The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. Cash and cash equivalents are carried at cost which approximates market value. At July 31, 1999, the Company has 79% of its cash and cash equivalents in three financial institutions. Marketable Securities Marketable securities consist of short-term debt securities which are considered to be held to maturity, and are carried at amortized cost which approximates fair value. F-8 IDT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Goodwill Goodwill is being amortized over 20 years using the straight-line method. Accumulated amortization at July 31, 1998 and 1999 was approximately $882,000 and $4,699,000 respectively. The Company systematically reviews the recoverability of its goodwill for each acquired entity to determine whether an impairment may exist. Upon a determination that the carrying value of goodwill will not be recovered from the undiscounted future cash flows of the acquired business, the carrying value of such goodwill would be considered impaired and will be reduced by a charge to operations in the amount of the impairment. Income Taxes The Company accounts for income taxes on the liability method. Under this method, deferred tax assets and liabilities are determined based on differences between the financial reporting and tax bases of assets and liabilities. Earnings (Loss) Per Share Basic earnings (loss) per share is computed by dividing the net income (loss) applicable to common shares by the weighted average of common shares outstanding during the period. Diluted earnings (loss) per share adjusts basic earnings (loss) per share for the effects of convertible securities, stock options, warrants and other potentially dilutive financial instruments, only in the periods in which such effect is dilutive. Current Vulnerability Due to Certain Concentrations Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash, cash equivalents, marketable securities, trade receivables and notes receivable. Concentrations of credit risk with respect to trade receivables are limited due to the large number of customers comprising the Company's customer base. At July 31, 1999, the Company has 90% of its notes receivable with one company, and 11% of its accounts receivable balance with one company. International customers account for a significant amount of the Company's total revenues. Therefore, the Company is subject to risks associated with international operations, including changes in exchange rates, difficulty in accounts receivable collection and longer payment cycles. Management regularly monitors the creditworthiness of its domestic and international customers and believes that it has adequately provided for any exposure to potential credit losses. Fair Value of Financial Instruments The estimated fair value of financial instruments has been determined using available market information or other appropriate valuation methodologies. However, considerable judgment is required in interpreting market data to develop estimates of fair value. Consequently, the estimates are not necessarily indicative of the amounts that could be realized or would be paid in a current market exchange. The following methods and assumptions were used by the Company in estimating the fair value of its financial instruments: Notes receivable: For notes receivable which are short-term or have variable interest rates, fair values are based on carrying values. The fair values of notes receivable with fixed interest rates with long-term maturities are estimated using discounted cash flow analysis, using interest rates currently being offered for F-9 IDT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) notes with similar terms to borrowers of similar credit quality. The fair value of notes receivable at July 31, 1998 and 1999 approximates $23,172,000 and $17,082,000, respectively. Notes payable: For notes payable which are short-term or have variable interest rates, fair values are based on carrying values. The fair values of notes payable with fixed interest rates with long-term maturities are estimated using discounted cash flow analysis using interest rates that are currently being offered on similar instruments. The fair value of notes payable at July 31, 1998 approximates $98,700,000. The fair value of the notes payable at July 31, 1999 approximate their carrying value, due to their variable rate of interest. Segment Disclosures The Company uses the "management approach" model for segment reporting. The management approach model is based on the way a company's management organizes segments within the company for making operating decisions and assessing performance. Stock Based Compensation The Company accounts for stock options issued to employees using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees ("APB 25"). Compensation expense for stock options issued to employees is measured as the excess of the quoted market price of the Company's stock at the date of grant over the amount an employee must pay to acquire the stock. The Company applies the disclosure-only provisions of Statement of Financial Accounting Standards ("SFAS") No. 123, Accounting for Stock-Based Compensation, with respect to stock options issued to the Company's employees. In March 1999, the Financial Accounting Standards Board issued an exposure draft of an interpretation on APB 25 containing proposed rules designed to clarify its application. The proposed rules included in the exposure draft are expected to be formally issued prior to December 31, 1999 and become effective at the time they are issued. The proposed rules would generally be applicable to events that occur after December 15, 1998. Consequently, if the exposure draft is enacted in the form currently proposed, the new rules would apply to all stock options granted by the Company in fiscal 1999. Recently Issued Accounting Standards In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities ("SFAS No. 133"). This statement establishes accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded on the balance sheet as either an asset or liability measured at its fair value. This statement requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows derivative's gains and losses to offset related results on the hedge item in the income statement, and requires a company to formally document, designate and assess the effectiveness of transactions that receive hedge accounting. This statement is effective for fiscal years beginning after June 15, 2000 and cannot be applied retroactively. The Company believes that the adoption of this standard will not have a material effect on the Company's consolidated results of operation or financial position due to their limited use of derivative instruments. F-10 IDT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 2. Notes Receivable In May 1998, the Company entered into an agreement with a telecommunication company to provide it with a $25,000,000 revolving credit facility (the "Facility"). The Facility bore interest at a rate of 5% per annum. The unpaid principal and accrued interest on the Facility were payable in quarterly installments, as defined in the agreement, which payments commenced on February 1, 1999. As of July 31, 1998 and 1999, the outstanding balance on the Facility of approximately $12,600,000 and $19,000,000, respectively, are included in notes receivable. In October 1999, the Facility's remaining principal balance was repaid in full. 3. Property, Plant and Equipment Property, plant and equipment consists of the following:
July 31 ------------------------- 1998 1999 ----------- ------------ Equipment........................................ $77,612,461 $100,145,353 Computer software................................ 10,027,335 38,916,589 Leasehold improvements........................... 1,930,769 3,650,936 Furniture and fixtures........................... 1,905,048 2,447,210 Land and building................................ -- 6,312,190 ----------- ------------ 91,475,613 151,472,278 Less accumulated depreciation and amortization... (16,143,137) (37,349,355) ----------- ------------ Property, plant and equipment, net............... $75,332,476 $114,122,923 =========== ============
Fixed assets under capital leases aggregate approximately $18,570,000 and $30,469,000 at July 31, 1998 and 1999, respectively. The accumulated amortization related to these assets under capital leases is approximately $2,885,000 and $8,266,000 at July 31, 1998 and 1999, respectively. 4. Notes Payable Notes payable consists of the following:
July 31 -------------------------- 1998 1999 ------------ ------------ Senior Notes (A)................................. $100,000,000 $ 380,000 Senior Credit facilities (B)..................... -- 108,146,000 Promissory note (C).............................. -- 7,367,000 Other............................................ 3,700,000 1,833,000 ------------ ------------ 103,700,000 117,726,000 Less notes payable--current portion.............. (1,866,000) (4,753,000) ------------ ------------ Notes payable--long-term portion................. $101,834,000 $112,973,000 ============ ============
F-11 IDT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (A) On February 18, 1998, the Company completed an offering of $100,000,000 in Senior Notes (the "Notes"). Such Notes bear interest, which is payable semiannually on February 15 and August 15, at 8.75% per annum, mature on February 15, 2006 and are general unsecured obligations of the Company. On May 10, 1999, the Company repaid $99,620,000 of the principal balance together with accrued interest at a redemption price equal to 102% of the repaid principal balance. The Company recorded a pre-tax extraordinary loss in connection with the repayment of $5,359,787 during the year ended July 31, 1999. (B) On May 10, 1999, the Company obtained a Senior Secured Credit Facility ("Credit Facility") from a consortium of financial institutions. The Credit Facility, as amended, consists of a $25,000,000 revolving line of credit, maturing on May 9, 2003, a $60,000,000 multi-draw term loan, payable in equal quarterly principal payments commencing February 2001, and ending May 9, 2003, and a $75,000,000 single-draw term loan, requiring payments of 1% of the principal balance for the first four years, and the remaining principal balance in four equal quarterly payments thereafter. The Credit Facility bears interest at base rates, as defined, plus 2.50% to 3.50%. The Credit Facility is collateralized by 100% of the capital stock of IDT's domestic subsidiaries, and other assets. At July 31, 1999, $25,000,000 of the revolving line of credit, and $26,854,000 of the $60,000,000 multi-draw term loan remain unused. (C) On May 6, 1999, the Company entered into a $7,800,000 promissory note with a financing company. The note is payable in 36 monthly installments commencing on June 1, 1999, and bears an adjustable interest rate indexed to the one month LIBOR rate. The promissory note is collateralized by certain equipment of the Company. On September 5, 1997, the Company completed a private placement of $7,500,000 in convertible debentures. Such convertible debentures bore interest at 3% per annum which was payable upon their maturity on September 5, 2000. In April 1998, the holders of $6,500,000 in principal amount of the convertible debentures elected to convert all outstanding principal and unpaid accrued interest thereon into 436,781 shares of the Company's common stock. The remaining $1,000,000 in convertible debentures and all unpaid accrued interest thereon were repaid in June 1998. Annual future principal repayments of long-term debt for the five years subsequent to July 31, 1999 consist of $4,753,000 due in fiscal 2000, $13,612,000 due in fiscal 2001, $16,287,000 due in fiscal 2002, $28,506,000 due in fiscal 2003, $54,188,000 due in fiscal 2004 and $380,000 due thereafter. 5. Related Party Transactions In connection with the incorporation of Net2Phone in October 1997, Net2Phone and the Company entered into a separation agreement in May 1999 whereby the transactions and agreements necessary to govern the relationship between the two companies to effect their separation were determined. During the periods prior to the signing of the aforementioned agreements, service costs were generally allocated based upon a percentage of total revenue earned or payroll expense incurred by Net2Phone. Such allocated costs approximate the amounts that would have been charged under the intercompany agreements if they had been in effect during such periods. F-12 IDT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 6. Income Taxes Significant components of the Company's deferred tax assets and liabilities consists of the following:
July 31 ---------------------- 1998 1999 ----------- ---------- Deferred tax assets: Bad debt reserve................................... $ 2,577,000 $3,045,000 Exercise of stock options.......................... 8,790,000 7,926,000 Other.............................................. 1,263,000 1,743,000 ----------- ---------- Deferred tax assets.................................. 12,630,000 12,714,000 ----------- ---------- Deferred tax liabilities: Depreciation....................................... 1,880,000 2,760,000 Gain on sale of subsidiary stock................... -- 8,645,000 ----------- ---------- Deferred tax liabilities............................. 1,880,000 11,405,000 ----------- ---------- Net deferred tax assets.......................... $10,750,000 $1,309,000 =========== ==========
No valuation allowance on the net deferred tax assets has been established as the realization of such net deferred tax assets is considered to be more likely than not. At July 31, 1999, based upon tax returns filed and to be filed, the Company had net operating loss carryforwards for federal income tax purposes of approximately $20 million attributable to the exercise of stock options expiring in the years 2018 through 2019. These net operating loss carryforwards may be limited in their use in the event of significant changes in the Company's ownership. The provision (benefit) for income taxes consists of the following for the years ended July 31:
1997 1998 1999 ---- ----------- ----------- Current: Federal...................................... $-- $ -- $ 400,000 State and local.............................. -- 200,000 -- ---- ----------- ----------- -- 200,000 400,000 ---- ----------- ----------- Deferred: Federal...................................... -- (1,519,000) 14,300,000 State and local.............................. -- (441,000) 1,060,000 ---- ----------- ----------- -- (1,960,000) 15,360,000 ---- ----------- ----------- $-- $(1,760,000) $15,760,000 ==== =========== ===========
The income statement classification of the provision (benefit) for income taxes consists of the following at July 31:
1997 1998 1999 ---- ----------- ----------- Income tax provision (benefit) attributable to continuing operations.................. $-- $(1,671,000) $17,850,000 Income tax benefit attributable to extraordinary loss........................ -- (89,000) (2,090,000) ---- ----------- ----------- $-- $(1,760,000) $15,760,000 ==== =========== ===========
F-13 IDT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The differences between income taxes expected at the U.S. federal statutory income tax rate and income taxes provides are as follows:
1997 1998 1999 ----------- ----------- ----------- Federal income tax at statutory rate............................... $(1,343,000) $(1,373,000) $ 7,255,000 Purchased research and development.. -- 8,788,000 -- Change in valuation allowance....... 1,534,000 (9,294,000) -- Losses for which no benefit provided........................... -- -- 6,110,000 Non-deductible expenses............. -- -- 1,673,000 State and local income tax.......... (227,000) 328,000 692,000 Other, net.......................... 36,000 (209,000) 30,000 ----------- ----------- ----------- $ -- $(1,760,000) $15,760,000 =========== =========== ===========
7. Stockholders' Equity Common Stock and Class A Stock The rights of holders of common stock and holders of Class A stock are identical except for voting and conversion rights and restrictions on transferability. The holders of Class A stock are entitled to three votes per share and the holders of common stock are entitled to one vote per share. Class A stock is subject to certain limitations on transferability that do not apply to the common stock. Each share of Class A stock may be converted into one share of common stock, at any time at the option of the holder. Warrants In July 1997, the Company issued warrants to purchase 35,906 shares of its common stock at $8.34 per share and 63,098 shares of its common stock at $6.96 per share to a leasing company in connection with a capital lease. During the years ended July 31, 1998 and 1999, all of such warrants were exercised. In September 1997, the Company issued warrants to purchase 75,000 shares of the Company's common stock at $15.16 per share to placement agents in connection with a private placement of $7,500,000 in convertible debentures. The holders of these warrants exercised warrants to purchase 35,003 and 12,234 shares, respectively, of the Company's common stock in Fiscal 1998 and 1999. Stock Options Prior to March 15, 1996, the Company had an informal stock option program whereby employees were granted options to purchase shares of common stock. Under such program, options to purchase 2,158,770 shares of Common stock were granted. On March 15, 1996, the Company adopted a stock option plan (the "Option Plan") for officers, employees and non-employee directors to purchase up to 2,300,000 shares of the Company's common stock. In 1998, the number of shares of common stock reserved for issuance under the Option Plan was increased to 3,300,000. Generally, options become exercisable over vesting periods up to six years and expire ten years from the date of grant. On February 15, 1997, the Company canceled 1,272,250 outstanding options with an exercise price of $10.00 and granted new options with an exercise price at the market value on that date of $7.75. On April 16, 1997, the Company canceled 603,500 outstanding options with an exercise price of $7.75 and granted new options with an exercise price at the market value on that date of $4.375. F-14 IDT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) A summary of stock option activity under the Company's stock option plan is as follows:
Weighted Average Shares Exercise Price ---------- -------------- Outstanding at July 31, 1996...................... 3,503,520 $ 9.15 Granted........................................... 3,807,544 6.50 Exercised......................................... (969,100) 2.08 Canceled.......................................... (1,875,750) 9.28 Forfeited......................................... (67,188) 4.47 ---------- ------- Outstanding at July 31, 1997...................... 4,399,026 3.89 Granted........................................... 1,270,300 14.00 Exercised......................................... (1,615,366) 3.28 Forfeited......................................... (839,325) 5.00 ---------- ------- Outstanding at July 31, 1998...................... 3,214,635 7.90 Granted........................................... 1,136,241 15.21 Exercised......................................... (696,840) 5.86 Canceled.......................................... (58,000) 14.85 Forfeited......................................... (8,070) 8.27 ---------- ------- Outstanding at July 31, 1999...................... 3,587,966 $ 10.50 ========== =======
The following table summarizes the status of stock options outstanding and exercisable at July 31, 1999:
Stock Options Outstanding --------------------------------- Weighted- Number of Number Remaining Stock Range of of Contractual Options Exercise Prices Options Life Exercisable --------------- --------- ----------- ----------- $ 0.21 - $ 0.21............................ 376,550 5.0 376,550 $ 0.41 - $ 0.41............................ 8,816 5.7 8,816 $ 0.83 - $ 0.83............................ 40,500 5.0 40,500 $ 1.65 - $ 1.65............................ 15,000 5.7 15,000 $ 4.38 - $ 6.50............................ 568,700 7.5 543,699 $ 6.88 - $10.00............................ 1,034,900 7.6 660,400 $11.25 - $15.44............................ 939,750 9.4 157,625 $17.00 - $24.25............................ 429,750 8.6 184,833 $26.25 - $34.00............................ 174,000 8.6 173,000 --------- --------- 3,587,966 2,160,423 ========= =========
The weighted average fair value of options granted was $3.21, $4.46, and $9.26 for the years ended July 31, 1997, 1998, and 1999, respectively. Pro forma information regarding net loss and loss per share is required by SFAS 123, and has been determined as if the Company had accounted for employees' stock options under the fair value method provided by that statement. The fair value of the stock options was estimated at the date of grant using the Black-Scholes option pricing model with the following assumptions for vested and non-vested options. F-15 IDT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
July 31 ----------------------- 1997 1998 1999 ------- ------- ------- Assumptions Average risk-free interest rate.................... 6.11% 5.92% 4.67% Dividend yield..................................... -- -- -- Volatility factor of the expected market price of the Company's common stock........................ 89% 84% 84% Average life....................................... 6 years 5 years 5 years
The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. For purposes of pro forma disclosures, the estimated fair value of the options under SFAS 123 is amortized to expense over the options' vesting period. For the years ended July 31, 1997, 1998 and 1999, pro forma net loss and pro forma net loss per share under SFAS 123 amounted to approximately $(10,054,000), $(16,508,000) and $(32,175,000) respectively, and $(0.48) $(0.58), and $(0.96), respectively. Net2Phone Stock Options In the fourth quarter of fiscal 1999, Net2Phone granted options to purchase 8,811,500 shares of its common stock at exercise prices ranging from $3.33 to $15.00 per share to its employees and employees of IDT. In connection with the exercise of such options, Net2Phone extended $3,149,900 of recourse loans to its employees. In order to obtain the loans, optionees agreed to the cancellation of 23,382 outstanding options. Deferred compensation resulting from Net2Phone's issuance of stock options of approximately $44.1 million is being charged to expense over the vesting period of the stock options as follows: fiscal 1999, $16.0 million; fiscal 2000, $10.4 million; fiscal 2001, $10.4 million; and fiscal 2002, $7.3 million. Public Offering On February 3, 1998, the Company completed a public offering of 5,093,750 shares of its common stock for $24.875 a share. The Company realized net proceeds of approximately $118.3 million from this offering. On August 3, 1999, Net2Phone completed an initial public offering of 6,210,000 shares of its Common Stock (the "Initial Public Offering") at a price of $15.00 per share, resulting in net proceeds of approximately $85.3 million. In connection with the Initial Public Offering, the Company's ownership percentage in Net2Phone decreased to approximately 56.2%. In connection with the Initial Public Offering, the Company recorded a gain on sale of stock by a subsidiary of approximately $21,611,000. Such gain is included in other income at July 31, 1999. Net2Phone Series A Stock On May 13, 1999, Net2Phone designated 3,150,000 shares of its preferred stock as Series A ("Series A Stock") and sold 3,140,000 of such shares to unrelated third parties in a private placement transaction for aggregate gross proceeds of $31,400,000. F-16 IDT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The Series A Stock contained beneficial conversion features. The total value of the beneficial conversion feature approximated $75 million. For accounting purposes the value of the beneficial conversion feature was limited to the amount of proceeds allocated to the Series A Stock. The Company recorded an increase in net loss available to common stockholders on the date of issuance of the Series A Stock in the amount of approximately $26.3 million representing their allocable share of the amount attributable to the beneficial conversion feature. 8. Commitments and Contingencies Legal Proceedings In December 1995, Surfers Unlimited, L.L.C. filed a breach of contract action in the New Jersey Superior Court, Bergen County. The suit names a subsidiary of the Company as defendant and seeks restitutional and consequential damages in an unspecified amount for interference with prospective business advantages, breach of contract and improper use of confidential and proprietary information. Howard S. Jonas, the Chairman and Chief Executive Officer of the Company, has also been named as a defendant in the action. The Company's subsidiary has filed a counterclaim based on interference with prospective business advantages, breach of contract and improper use of confidential and proprietary information. In September 1999, the Company's subsidiary, Howard S. Jonas and Surfers Unlimited L.L.C. entered into a confidential settlement agreement. In January 1997, six former employees alleging employment discrimination commenced a suit in New Jersey Superior Court, Bergen County. Howard S. Jonas has also been named as a defendant in the action. The action claims that the Company has made hiring and promotion decisions based upon the religious backgrounds of the relevant individuals, in violation of federal and state law. The complaint seeks compensatory and punitive damages in an unspecified amount and also seeks statutory multiples of damages. All of the claims arising under federal law were dismissed by the Court in New Jersey Superior Court, Bergen County, leaving the plaintiffs with only the remedies available under state law. Further, the Court granted the Company permission to file counterclaims against all plaintiffs for the alleged unlawful taking of business records. The Company filed such counterclaims in October 1998. Discovery is continuing and a settlement conference has been scheduled for November 10, 1999. In August 1998, a subsidiary of the Company, InterExchange, Inc. ("IX"), filed a complaint in the New Jersey Superior Court, Middlesex County, against PT-1 Communications, Inc. ("PT-1"). The action has been removed to the U.S. District Court for the District of New Jersey. The action arises from a contract in which IX and PT-1 agreed that PT-1 would route its traffic from prepaid calling cards through IX's debit card platform. In the action, IX claimed that PT-1 breached its contract with IX by failing to make required payments under the contract, and claimed compensatory damages in the amount of $8.5 million. In February 1999, PT-1 filed an answer and counterclaim and third party complaint against IX, the Company, and certain of their officers, including Howard S. Jonas. PT-1 alleges that IX is not entitled to these payments in that IX had breached the agreement, and that, following IX's 1998 merger agreement with the Company, in which IX become a wholly-owned subsidiary of the Company, IX violated its covenant in the agreement that it would not compete with PT-1. PT-1 also alleges, among other things, that the Company and Mr. Jonas tortiously interfered with the contract between IX and PT-1, and that they conspired with IX and its personnel to obtain confidential information relating to PT-1. PT-1 seeks compensatory damages and punitive damages. In May 1999, the Company and Howard S. Jonas filed an answer to PT- 1's third party complaint and IX filed a motion for leave to amend their complaint to add Star Telecommunications and Samer Tawfik as additional defendants and to include the additional claims of tortious interference and fraud in the inducement. The Company and individual plaintiffs David Turock, Eric Hecht, Bradley Turock and Richard Robbins have sought leave to amend their counterclaims to include Star Telecommunications as an additional defendant for failure to permit plaintiff to execute certain stock warrants to purchase PT-1 stock. The Court has issued an order which provides that PT-1 may not allege a specific amount of damages although the order does not forbid PT-1 from claiming damages in general. Discovery is continuing and a trial date has not been scheduled. F-17 IDT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The Company is subject to other legal proceedings and claims which have arisen in the ordinary course of its business and have not been finally adjudicated. In the opinion of management, settlement of these and the aforementioned actions when ultimately concluded will not have a material adverse effect on results of operations, cash flows or the financial condition of the Company. Lease Obligations The future minimum payments for all capital and operating leases as of July 31, 1999 are approximately as follows:
Operating Capital Leases Leases Year ending July 31: ----------- ----------- 2000................................................ $ 5,561,000 $ 7,328,000 2001................................................ 5,112,000 5,498,000 2002................................................ 4,838,000 4,682,000 2003................................................ 3,994,000 4,159,000 2004................................................ 2,239,000 1,414,000 Thereafter.......................................... 3,370,000 -- ----------- ----------- Total payments...................................... $25,114,000 23,081,000 =========== Less amount representing interest................... (1,310,000) Less current portion................................ (6,029,000) ----------- Capital lease obligations--long-term portion........ $15,742,000 ===========
Rental expense under operating leases was approximately $388,000, $1,225,000 and $2,821,000 for the years ended July 31, 1997, 1998 and 1999, respectively. Commitments The Company has an agreement with a supplier of telecommunications services ("Vendor") which began in August 1994 and continues monthly unless terminated by one of the parties. Under such agreement, the Vendor bills and collects, on behalf of the Company, for long distance telephone services provided to the Company's customers. The Company is responsible for all uncollected receivables. For the years ended July 31, 1997, 1998 and 1999, the Company purchased approximately $5,271,000, $5,997,000 and $10,214,000 respectively, of such services from the Vendor. The Company has entered into agreements with certain carriers to buy and sell communications services. At July 31, 1999, the Company's minimum purchase commitments related to such agreements consist of $27,154,000 in Fiscal 2000, $14,888,000 in Fiscal 2001, $3,713,000 in Fiscal 2002, $2,485,000 in Fiscal 2003, and $1,440,000 in Fiscal 2004. In September 1998, the Company entered into a 20 year agreement with a carrier to provide the Company with nationwide bandwidth capacity and maintenance services in exchange for total payments estimated at $32.0 million. On January 31, 1999, the Company entered into a series of agreements with a third party. The agreements call for the bundling of the Company's Internet telephony products with the third party's Internet browser, the purchase of software from the third party and the use of the third party's trademark. The agreements require the Company to pay the third party (i) $5,000,000 for the use of the trademark, (ii) $8,000,000 for the purchase of software and (iii) commissions on revenues generated from customers that the Company obtains from the F-18 IDT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) bundling of products. Through July 31, 1999, the Company had paid $1,500,000 and accrued $3,500,000 for the right to use the trademark and $8,000,000 for certain software. The Company has capitalized the costs of the right to use the trademark and the software costs and will amortize them over the term of the bundling agreement, which expires two years after the release of the bundled product. On February 8, 1998, the Company entered into an agreement with an Internet company to develop a link between its Internet site and that of the Company and advertise Company products on such site. The agreement is effective for fifteen months upon the completion of the link and automatically extends for an additional one year unless terminated by either party. Pursuant to such agreement, the Company has made payments of $3.3 million through July 31, 1999 for the design, development, installation and implementation of the link as well as the placement of Company advertisements on the Internet company's site, of which $750,000 attributable to the establishment of such link was deferred and is being amortized over the term of the agreement and $2.4 million attributable to monthly payments for advertising and the maintenance of the link was expensed monthly as incurred. As of July 31, 1999, the Company was required to make an additional payment of $150,000 in fiscal 1999 and pay certain future commissions, as defined, based upon revenue earned and usage of the link. On February 19, 1999, the Company entered into an agreement under which an international computer company is to provide connections to its global network. These connections will allow worldwide transport of the Company's IP traffic. The agreement is effective for 63 months upon availability of the connections. Pursuant to such agreement, the Company has made payments of $1 million through July 31, 1999 which have been reflected on the balance sheets as other current assets. As of July 31, 1999, the Company is required to make an additional payment of $1 million when the connections are available and pay fees for additional connections and usage. The $2 million of prepayments will be amortized over the term of the agreement beginning at the time the connections are available for use. The Company entered into an agreement with Snap, an Internet portal service of NBC and CNET, on May 17, 1999. Snap will display links to the Company's Web site and services on its Snap.com Web site. In addition, the Company is Snap's preferred provider of PC-to-phone services during the two-year term of this agreement. Snap also will deliver a preset minimum number of impressions on its site and agreed to give the Company the right to advertise on its Snap.com Web site, subject to certain conditions. In exchange, the Company agreed to pay Snap a one-time fee, a percentage of revenue generated through their site and bonus payments for customers delivered by Snap of $2,000,000 after meeting certain quotas. The Company will amortize the up front payment over the term of the agreement The Company signed an agreement with NBC on June 25, 1999 to purchase $1.5 million in television advertising on the NBC television network. The Company also has the right to purchase additional spots to be telecast prior to June 30, 2000. The cost of the advertising will be expensed as the spots are shown. On July 15, 1999, the Company entered into a four-year distribution and marketing agreement with ICQ, a subsidiary of America Online. Under this agreement, ICQ has agreed to co-brand and promote the Company's Internet telephony services in the U.S. and in 19 other countries, embed customized versions of the Company's software to allow ICQ customers to make PC-to-phone and PC-to-PC calls and to receive phone-to-PC calls, share revenue from advertisements and sponsorships sold by ICQ on the Company's software that is embedded in ICQ's Instant Messenger software, and promote the Company's services on some of ICQ's Web sites. The Company agreed to pay ICQ a fee of $7.5 million, $4.0 million of which was paid at signing and the remainder of which was paid in September 1999. The Company also agreed to pay ICQ a share of minutes-based revenue generated through ICQ and to award ICQ a performance bonus on the basis of the total revenue derived under the agreement, and to promote ICQ on the Company's Web sites. F-19 IDT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) In connection with the Company's distribution and marketing agreement with ICQ, the Company issued a warrant to America Online to purchase up to 3% of Net2Phone's outstanding capital stock on a fully-diluted basis. This warrant will vest in 1% increments upon the achievement of each of three incremental thresholds of revenue generated under the agreement during the first four years that the warrant is outstanding. The per share exercise price under the warrant will be equal to the lesser of 80% of the price per share in Net2Phone's initial public offering, or $450 million divided by the number of the Company's fully-diluted shares on the initial exercise date. The warrant may be exercised for a period of five years from the date of issuance. Distribution Agreements The Company has entered into distribution agreements under which it has agreed to pay its agents commissions for obtaining new Internet, debit card, Internet telephony and discount telecommunications customers. The agreements require commissions upon activation of the customers. 9. Business Segment Information Based principally on products and services provided, the Company has identified four reportable business segments: Wholesale Telecommunications Services, Retail Telecommunications Services, Internet Services and Internet Telephony. The operating results of these business segments are distinguishable, are regularly reviewed by Company management and are integral to their decision making process. The Wholesale Telecommunications Services business segment is comprised of wholesale carrier services sold to other U.S. and international carriers. The Retail Telecommunications Services business segment includes prepaid calling cards, international retail services and domestic long distance services. The Internet Services business segment includes dial-up access services, direct connect dedicated service, Genie online services and Net2Dine.com. The Internet Telephony business segment reflects the results of the Company's majority-owned subsidiary, Net2Phone, prior to the elimination of minority interests. F-20 IDT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The Company evaluates the performance of its business segments based primarily on operating income after depreciation and amortization but prior to interest expense and income taxes; all corporate overhead is allocated to the business segments based on time and usage studies. Operating results and other financial data presented for the principal business segments of the Company for the years ended July 31, 1997, 1998 and 1999 are as follows ($ in thousands):
Wholesale Retail Telecommunications Telecommunications Internet Internet Services Services Services Telephony Total ------------------ ------------------ -------- --------- -------- Year ended July 31, 1997 Total segment revenue... $ 65,389 $ 35,283 $33,435 $ 2,652 $136,759 Less: revenues between segments............... (735) -- (540) (297) (1,572) -------- -------- ------- -------- -------- Total unaffiliated revenue................ 64,654 35,283 32,895 2,355 135,187 Income (loss) from operations............. 3,444 2,263 (8,092) (1,060) (3,445) Depreciation and amortization........... 730 398 3,562 183 4,873 Total assets............ 21,626 11,790 24,205 916 58,537 Year ended July 31, 1998 Total segment revenue... $170,240 $137,159 $20,721 $ 12,006 $340,126 Less: revenues between segments............... (3,535) -- (720) (498) (4,753) -------- -------- ------- -------- -------- Total unaffiliated revenue................ 166,705 137,159 20,001 11,508 335,373 Income (loss) from operations............. 6,715 (781) (7,030) (2,650) (3,746) Depreciation and amortization........... 3,294 2,710 4,409 871 11,284 Total assets............ 205,083 168,723 36,415 6,975 417,196 Year ended July 31, 1999 Total segment revenue... $301,413 $395,542 $17,882 $ 33,256 $748,093 Less: revenues between segments............... (12,383) -- (948) (2,578) (15,909) -------- -------- ------- -------- -------- Total unaffiliated revenue................ 289,030 395,542 16,934 30,678 732,184 Income (loss) from operations............. 18,660 16,325 (8,197) (24,408) 2,380 Depreciation and amortization........... 8,056 11,233 4,699 2,266 26,254 Total assets............ 275,090 166,372 23,057 50,817 515,336
The income (loss) from operations for the Wholesale Telecommunications Services and Retail Telecommunications Services business segments for fiscal 1998 includes their pro-rata portion of a $25,000,000 non-recurring expense for the write-off of in-process research and development in connection with the acquisition of InterExchange, Inc. ("InterExchange") which was allocated to acquired research and development. Revenue from customers located outside of the United States represented approximately 25%, 11% and 13% of total revenue for the years ended July 31, 1997, 1998 and 1999, respectively, with no single foreign geographic area representing more than 10% of total revenues for any period presented. Long- lived assets held outside of the United States totaled approximately $9.9 million and $24.9 million as of July 31, 1998 and 1999, respectively. Long- lived assets held outside of the United States were insignificant as of July 31, 1997. 10. Additional Financial Information Trade accounts payable includes approximately $23,724,000 and $57,336,000 due to Telecommunication carriers at July 31, 1998 and 1999, respectively. 11. Acquisitions In November 1997, the Company completed the acquisition of 100% of the issued and outstanding common stock of Rock Enterprises, Inc. ("Rock"), a former consultant of the Company, for an aggregate purchase price F-21 IDT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) of $5,312,500. The purchase price consists of 625,000 shares of the Company's common stock. The Company issued 312,500 of such shares on the closing date of the acquisition in November 1997. The remaining shares will be issued in equal installments of 62,500 over the next five years on the anniversary of the closing date. The Company is accounting for such acquisition using the purchase method. Since Rock had no assets or liabilities, the entire purchase price has been allocated to goodwill. The operations of Rock have been included in the statement of operations since the date of the acquisition. In May 1998, the Company completed the acquisition of 51% of the issued and outstanding stock of Union Telecard Alliance, Inc. ("Union"), a former debit card reseller of the Company for an aggregate purchase price of $2,650,000. The purchase price consisted of 100,000 shares of the Company's common stock. Pursuant to the acquisition agreement, the Company issued an additional 100,000 shares of the Company's common stock valued at $2,850,000 in April 1999. Such issuance was based upon Union meeting certain operating criteria for the 12 month period subsequent to the date of acquisition, as defined. The Company accounted for such acquisition using the purchase method. Since Union had no assets or liabilities, the entire purchase price has been allocated to goodwill. The operations of Union have been included in the statement of operations since the date of the acquisition. In May 1998, the Company completed the acquisition of Interexchange, Inc., a former debit card service platform provider of the Company, for an aggregate purchase price of $90,588,000. The purchase price consists of $20,000,000 in cash, 3,242,323 shares of the Company's common stock and $588,000 in professional fees incurred in connection with the acquisition. Such shares are in escrow and 648,465 shares were released six months after the closing with the remaining 2,593,858 shares to be released in equal installments every 12 months thereafter for the next four years. The Company is accounting for such acquisition using the purchase method. The fair value of the assets acquired and liabilities assumed from Interexchange at the date of acquisition is summarized as follows: Current assets................................................ $ 36,000 Property and equipment........................................ 5,539,000 Current liabilities........................................... (7,357,000) Acquired research and development............................. 25,000,000 Goodwill...................................................... 67,370,000 ----------- $90,588,000 ===========
In connection with such acquisition, the Company immediately expensed the amount allocated to in-process research and development of $25,000,000 in accordance with generally accepted accounting principles, as technological feasibility had not been established and the technology had no alternative future use as of the date of the acquisition. F-22 IDT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The pro forma unaudited consolidated results of operations assuming consummation of the Interexchange acquisition as of the beginning of the respective periods are as follows:
July 31 -------------------------- 1997 1998 ------------ ------------ Revenues....................................... $144,937,000 $344,272,000 Net loss before extraordinary item............. (6,585,000) (5,762,000) Net loss....................................... (6,585,000) (5,894,000) Loss per share................................. (0.27) (0.21)
The pro forma unaudited consolidated results of operations in fiscal 1997 does not include a $25,000,000 non-recurring expense for the write-off of in- process research and development in fiscal 1998. 13. Subsequent Events Telefonica Agreement In October 1999, IDT entered into a joint venture agreement with Terra Networks, S.A. (formerly known as Telefonica Interactiva, S.A.) pursuant to which the parties formed two limited liability companies to provide Internet services and products for customers in the United States, mainly targeting and focusing on the Hispanic population in the United States. One company was formed to provide Internet access to customers in the target market, and IDT contributed its dial-up Internet access customers, its managerial resources and facilities and its portfolio of current and future products for Internet access to the new company in exchange for a 49% ownership interest. The other company was formed to develop and manage an Internet portal that will provide content-based Internet services, electronic commerce offerings and other Internet services to customers in the target market. IDT will assist in developing relationships with content producers and content providers and will sell advertising on this new company's portal in exchange for a 10% ownership interest. Terra Networks has agreed to fund the first $30 million of expenses for the ISP joint venture, subject to the completion of certain performance criteria. IDT/Westmintech Joint Venture In September 1999, a subsidiary of the Company entered into an agreement to form a joint venture with Westmintech Company, L.L.C., to provide high speed voice and data services, including without limitation local and long distance telephone service (dedicated and 1+), cable television service (cable and/or fiber optic), on line service with direct Internet access and Internet access services and various other Internet services (DSL, dedicated and dial up) and various other Internet services and other technology to the tenants of commercial and residential properties worldwide. The Company will have a 75% ownership interest in the joint venture. F-23 IDT CORPORATION FINANCIAL STATEMENT SCHEDULE--VALUATION AND QUALIFYING ACCOUNTS
Additions Balance at Charged to Balance Beginning Costs and at End Description of Period Expenses Deductions (1) of Period ----------- ---------- ---------- -------------- ---------- 1997 Reserves deducted from accounts receivable: Allowance for doubtful accounts................... $2,100,000 $4,592,000 $(3,502,000) $3,190,000 1998 Reserves deducted from accounts receivable: Allowance for doubtful accounts................... $3,190,000 $6,190,000 $(3,125,000) $6,255,000 1999 Reserves deducted from accounts receivable: Allowance for doubtful accounts................... $6,255,000 $5,558,000 $(4,170,000) $7,643,000
- -------- (1) Uncollectible accounts written off, net of recoveries. F-24 EX-10.19 2 INTERNET/TELECOMMUNICATIONS AGREEMENT EXHIBIT 10.19 INTERNET/TELECOMMUNICATIONS AGREEMENT INTERNET/TELECOMMUNICATIONS AGREEMENT, dated May 7, 1999 (this "Agreement"), by and between IDT Corporation, a Delaware corporation ("IDT"), and Net2Phone, Inc., a Delaware corporation ("Net2Phone"). WHEREAS, Net2Phone is currently a subsidiary of IDT; WHEREAS, IDT currently maintains a telecommunication switching infrastructure and network which provides Internet access and Internet telephony services for the customers of IDT and Net2Phone; WHEREAS, parties intend that Net2Phone be given an indefeasible right to use parts of IDT's Internet network. NOW, THEREFORE, in consideration of the premises and mutual promises and representations contained herein, and other good and valuable consideration, the sufficiency of which is hereby acknowledged, the parties hereto do mutually covenant, stipulate and agree as follows: 1. Internet Network. (a) Existing Network. IDT hereby grants and conveys to Net2Phone an ---------------- indefeasible right to use and enjoy, to the extent of IDT's rights therein, those equipment items, equipment leases and rights of use and/or access which are part of IDT's existing DS3 network and are described on Exhibit A hereto --------- (the "Existing Network"), such grant and conveyance to be effective as of the date hereof. The foregoing grant and conveyance shall terminate with respect to any item described on Exhibit A hereto upon the first of the following to occur: --------- (i) with respect to any part of the Existing Network, upon the expiration of the respective lease or other agreement set forth in Exhibit A relating to such part --------- of the Existing Network; (ii) with respect to any part of the Existing Network which will be replaced by the Frontier Network (as defined below), upon Net2Phone exercising its rights set forth in Section 2(a) hereof with respect to such part of the Existing Network; or (iii) with respect to any part of the Existing Network not sooner terminated pursuant to clauses (i) or (ii) above, upon the mutual consent of IDT and Net2Phone. Net2Phone hereby agrees it shall perform all obligations reasonably required of it by IDT and shall do nothing whatsoever in violation of the agreements set forth on Exhibit A. It is expressly understood that IDT --------- remains the primary party with respect to all agreements set forth on Exhibit A --------- and retains all obligations to pay rent and/or usage fees in connection therewith. (b) Frontier Network. Pursuant to a Telecommunications Services ---------------- Agreement, dated September 24, 1998 (the "Frontier Agreement"), by and between IDT and Frontier Communications of the West, Inc. ("Frontier"), IDT has an indefeasible right to use a certain telecommunication network as it is completed and delivered pursuant to the terms and conditions set forth in the Frontier Agreement. IDT hereby grants and conveys to Net2Phone an indefeasible right to use and enjoy, to the extent of IDT's rights therein, those parts of such telecommunication network which are described on Exhibit B --------- hereto (the "Frontier Network"), such grant and conveyance to be effective, with respect to those parts of the Frontier Network which have already been completed and delivered, on the date hereof and, with respect to any part of the Frontier Network which has not yet been completed and delivered, on the date such part of the Frontier Network is completed and delivered. The foregoing grant and conveyance with respect to the Frontier Network shall terminate upon the expiration of the Frontier Agreement, in accordance with its terms; provided, -------- however, Net2Phone shall have the right to request an earlier termination of - ------- such grant and conveyance, in whole or in part, which request shall be granted by IDT solely in the event that Frontier agrees to amend the Frontier Agreement to permit a termination of IDT's corresponding obligations under the Frontier Agreement and that Net2Phone pays all costs and expenses incurred to secure Frontier's consent to such amendment. Net2Phone hereby agrees it shall perform all obligations reasonably required of it by IDT and shall do nothing whatsoever in violation of the Frontier Agreement. It is expressly understood that IDT remains the primary party with respect to the Frontier Agreement and retains all obligations to pay maintenance and/or usage fees in connection therewith. (c) Networking Infrastructure. IDT hereby grants and conveys to ------------------------- Net2Phone the right to use and enjoy, to the extent of IDT's rights therein, the equipment, equipment leases, co-location agreements and rights of use and/or access primarily located at the backbone points of presence on its Internet network and comprising its networking infrastructure, as more particularly described on Exhibit C hereto (the "Networking Infrastructure Equipment"), for a --------- period of two years commencing on the date hereof. Net2Phone hereby agrees that it shall perform all obligations reasonably required of it by IDT and shall do nothing whatsoever in violation of the leases and other agreements set forth on Exhibit C. It is expressly --------- understood that IDT remains the primary party with respect to all agreements set forth on Exhibit C and retains all obligations to pay rent and/or usage fees in --------- connection therewith. (d) Transit Relationship Agreements. IDT hereby agrees to enter into ------------------------------- transit relationship agreements with Net2Phone to provide Net2Phone with rights of access substantially identical with those of IDT at the locations set forth on Exhibit D hereto, for a period of one year commencing on the date hereof. In --------- accordance with current industry custom, such transit relationships shall be provided on a mutual and gratuitous basis. At the end of such initial term and of each year thereafter, such rights of access shall automatically renew for an additional one (1) year period unless one party has given the other party sixty (60) days' prior written notice terminating such rights of access. Following such initial term, such rights of access may be terminated at any time at the option of either IDT or Net2Phone upon sixty (60) days' prior written notice. (e) Network Operations Center. IDT hereby grants and conveys to ------------------------- Net2Phone the right to use and enjoy, to the extent of IDT's rights therein, the equipment, equipment leases and rights of use and/or access and other facilities comprising its Network 2 Operations Center, as more particularly described on Exhibit E hereto (the "NOC --------- Facilities"), for a period of two years commencing on date hereof. Net2Phone hereby agrees that upon such grant and conveyance it shall perform all obligations reasonably required of it by IDT and shall do nothing whatsoever in violation of the leases and other agreements set forth on Exhibit ------- E. It is expressly understood that IDT remains the primary party with respect - - to all agreements set forth on Exhibit E and retains all obligations to pay rent --------- and/or usage fees in connection therewith. The IDT employees at the NOC Facilities who are listed on Exhibit F hereto shall be transferred to, and --------- become employees of, Net2Phone on the date hereof or as promptly thereafter as is feasible so as to permit an orderly transition. (f) Maintenance and Support. With respect to leases and other ----------------------- agreements described in the Exhibits hereto, IDT shall use commercially reasonable efforts to cause the other parties to such leases and other agreements to fulfill their respective contractual obligations, including those (if any) relating to the maintenance of equipment or network access. With respect to equipment listed on the exhibits hereto which is or becomes owned by IDT or which is leased by IDT pursuant to leases which obligate IDT to maintain such equipment, IDT shall maintain such equipment in accordance with industry practice and, upon notice from Net2Phone of any malfunctioning of such equipment, shall promptly repair or cause the repair of such equipment. Net2Phone shall reimburse IDT for all costs and expenses incurred by IDT for the maintenance and repair of such equipment to the extent that IDT is contractually obligated for such maintenance and repair. Net2Phone shall also reimburse IDT for all necessary upgrades to such equipment and, to the extent permitted by the respective leases (if any), Net2Phone shall own any upgrades so installed. (g) Equipment with Expiring Leases. To the extent that any equipment ------------------------------ described on the Exhibits hereto is subject to a lease which terminates during the term of Net2Phone's right to use such item of equipment, following the termination of such lease IDT shall be responsible for providing Net2Phone with an item of equipment of equivalent function and quality for the remainder of Net2Phone's right of use hereunder. (h) No Modifications to Third Party Contracts. With respect to the ----------------------------------------- Frontier Agreement and all the leases and other agreements described on the Exhibits hereto from which IDT derives the rights necessary for Net2Phone to exercise the rights of use granted herein, IDT shall fulfill all of its obligations with respect to each such agreement and shall not amend, alter, supplement, terminate, cancel, assign, transfer or otherwise modify any such agreement without the prior written consent of Net2Phone; provided, however, -------- ------- that IDT's obligation with respect to any such agreement shall cease upon the expiration of the corresponding Net2Phone right of use granted herein. (i) No Assignment. This Agreement shall not be construed as an ------------- assignment or as an attempted assignment of any of the leases or other agreements set forth on the Exhibits hereto. To the extent that any transaction contemplated by the provisions of this Agreement requires the consent of a party to the leases or other agreements set forth on the Exhibits hereto (other than IDT), such transaction shall not be effective with respect to such lease or other agreement until such consent has been received and IDT hereby agrees to use all commercially reasonable efforts to procure such consent. 3 (j) Hosting Service. It is understood that IDT retains primary --------------- control over the Internet equipment listed on the Exhibits hereto. Notwithstanding the foregoing, to the extent that IDT requires Net2Phone's assistance in gaining Internet access as a result of Net2Phone exercising the rights to use the equipment and/or access granted to Net2Phone herein, Net2Phone hereby agrees to facilitate such access for a period of five years commencing on the date hereof. At the end of such initial term and of each year thereafter, Net2Phone's obligation to facilitate IDT's Internet access shall automatically renew for an additional one (1) year period unless one party has given the other party sixty (60) days' prior written notice terminating such facilitation of Internet access. Following such initial term, such facilitation of Internet access may be terminated at any time at the option of either IDT or Net2Phone upon sixty (60) days' prior written notice. As compensation to Net2Phone for facilitating such access, IDT agrees to pay for such usage and services as provided in Section 2(d) hereof. (k) Transfer Pricing. For a period of two years commencing on the ---------------- date hereof, Net2Phone hereby agrees (i) that IDT is hereby granted the right of first refusal to provide Net2Phone's carrier traffic, (ii) that any carrier traffic actually routed over IDT's direct routes (whether or not pursuant to the foregoing right of first refusal) shall be charged at the greater of (A) IDT's overall most favorite nation selling price less 5% and (B) IDT's cost plus 5%, and (iii) that any other carrier traffic actually routed over IDT's telecommunications network (whether or not pursuant to this right of first refusal) shall be charged at IDT's cost plus 10%. For a two year period commencing on the date hereof, each party hereby grants the other party an option to purchase bandwidth from such granting party at the granting party's cost plus 10% and Net2Phone hereby grants IDT an option to use Net2Phone's indirect telecommunications network (to the extent that Net2Phone has excess availability thereon) to route IDT's carrier traffic at Net2Phone's cost plus 10%. At the end of such initial terms and of each year thereafter, such agreements with respect to carrier traffic and bandwidth shall automatically renew for an additional one (1) year period unless one party has given the other party sixty (60) days' prior written notice terminating such respective agreements. Following such initial term, such agreements with respect to carrier traffic or bandwidth may be terminated at any time at the option of either IDT or Net2Phone upon sixty (60) days' prior written notice. (l) Network Unavailability. Each of the parties acknowledges that ---------------------- the Internet network or any of the networks or equipment referred to herein may be unavailable periodically for the purposes of maintenance and/or upgrades. Each of the parties further acknowledges that periodic service outages, known as "brownouts," may occur in connection with the network. Each of the parties shall use all reasonable efforts to minimize any such interruptions and brownouts with respect to equipment or other aspects of the network and network infrastructure which it controls. Each party agrees to hold the other party harmless of any and all losses arising to such party and/or any third parties as a result of "brownouts," service interruptions and server unavailability. Notwithstanding the foregoing, in the event that either Net2Phone or IDT suffers a "brownout" from the equipment or rights of access referenced in this Section 1 for any reason, IDT or Net2Phone, as the case may be, shall use reasonable commercial efforts to obtain a rebate or other concession from any third party which may have responsibility for such unavailability. In case either party receives any such rebate or concession, such party shall share any such rebate 4 or concession with the other in a manner reflecting the relative loss of usage incurred by each of Net2Phone and IDT. (m) With respect to any equipment or rights of use and/or access to which IDT has granted Net2Phone a right of use herein, Net2Phone shall have the right to use such equipment and access to the exclusion of IDT for the duration of the right granted herein. 2. Payments. -------- (a) Existing Network. On May 1, 1999, and on the first day of each ---------------- month thereafter until such time as the grant and conveyance set forth in Section 1(a) hereof has terminated in its entirety, Net2Phone shall pay to IDT an Existing Network Fee (as defined below) as compensation for the grant and conveyance set forth in Section 1(a) hereof with respect to the Existing Network. As the Frontier Network is completed and delivered, Net2Phone shall have the right to require IDT to terminate, in whole or in part, any or all of the leases and other agreements set forth in Exhibit A, to the extent permitted --------- by such instruments. With respect to any termination requested by Net2Phone, the actual date such lease or other agreement is terminated shall hereinafter be referred to as the "Termination Date" with respect to such lease or other agreement. To the extent that IDT incurs any termination or cancellation charges as a result of any such lease or contract termination, Net2Phone shall reimburse IDT for such charges upon demand. The Existing Network Fee shall equal, on each date payable, the product of $60,000 multiplied by a fraction, the numerator of which is the total mileage of all circuits set forth on Exhibit A hereto except those circuits with --------- respect to which a Termination Date has occurred and the denominator of which is the total mileage of all circuits set forth on Exhibit A hereto. Ten (10) days --------- following the end of any month in which a Termination Date has occurred, IDT shall refund to Net2Phone upon the request of Net2Phone that portion of the Existing Network Fee for such month representing the per diem charge for each circuit deemed terminated during such month (based on mileage) for the number of days in such month following the Termination Date with respect to such circuit. (b) Frontier Network. Pursuant to the Frontier Agreement, IDT must ---------------- pay Frontier certain non-recurring charges for the installation of the Frontier network, some of which IDT has already paid Frontier and the remainder of which IDT will pay Frontier as the network is completed and delivered. Upon the completion and delivery of each circuit set forth on Exhibit B, Net2Phone shall --------- pay to IDT an amount equal to the non-recurring charge with respect to such circuit (as set forth on Exhibit B) plus 10%, such amount to be paid with --------- interest at 9% per annum in sixty (60) equal monthly installments commencing thirty (30) days following the completion and delivery of such circuit. Upon the completion and delivery of all of the circuits set forth on Exhibit B, the --------- amount payable by Net2Phone with respect to the non-recurring charges for the individual circuits shall be aggregated and the payments restructured so that such aggregate outstanding amount shall be paid, with interest at 9% per annum, in equal monthly payments during the Restructured Term (as defined below) commencing thirty (30) days following the completion and delivery of the final circuit of the Frontier Network. The 5 "Restructured Term" shall commence thirty (30) days following the completion and delivery of the final circuit of the Frontier Network and shall continue for that number of months equal the weighted average, rounded to the nearest whole number, of the number of months remaining in the original payment periods of the individual circuits. In addition, Net2Phone shall pay to IDT with respect to the completion and delivery of the Frontier Network an installation fee of $600,000 (the "Installation Fee"). Upon the completion and delivery of each circuit set forth on Exhibit B hereto, Net2Phone shall pay to IDT an amount equal to the product --------- of the Installation Fee multiplied by a fraction, the numerator of which is the non-recurring charge with respect to such circuit (as set forth on Exhibit B) --------- and the denominator of which is the sum of all non-recurring charges (as set forth on Exhibit B) with respect to all of the circuits of the Frontier Network --------- described on Exhibit B hereto. --------- In addition, beginning on the date hereof and continuing until the termination in its entirety of the grant and conveyance with respect to the Frontier Network, Net2Phone shall reimburse IDT an amount equal to the costs and fees IDT incurs subsequent to the date hereof with respect to the Frontier Network pursuant to the Frontier Agreement (other than the non-recurring charges), such reimbursement shall be due and payable upon payment by IDT of such costs and fees. (c) Networking Infrastructure and Network Operations Center. For ------------------------------------------------------- 24 months commencing on April 1, 1999, Net2Phone shall pay to IDT $50,000 per month as compensation for the rights of usage and enjoyment with respect to the Networking Infrastructure Equipment (as set forth in Section 1(c) hereof) and the NOC Facilities (as set forth in Section 1(e) hereof). Upon the expiration of Net2Phone's rights to use and enjoy the Networking Infrastructure Equipment and NOC Facilities pursuant to Sections 1(c) and (e) hereof, IDT hereby grants to Net2Phone the right to purchase from IDT at fair market value any such items of equipment then owned by IDT. (d) Internet Usage and Services. During the period set forth in --------------------------- Section 1(j) hereof (as extended pursuant to the terms thereof), IDT shall pay on the first day of each month (i) for each of IDT's dial-up Internet customers, $1.00 and (ii) for each of IDT's dedicated-line Internet customers, the lesser of $100.00 or 20% of the fee that IDT charges such customer. Additionally, in the case of IDT's dedicated-line customers, IDT shall pay Net2Phone 25% of all installation fees charged such customers by IDT. 3. Ownership of Equipment and Intellectual Property. ------------------------------------------------ Nothing herein is intended to, nor shall it, change the legal ownership of any equipment or intellectual property. 4. Termination. ----------- (a) This Agreement may only be terminated by the mutual agreement of the parties in writing, except as specifically set forth in this Agreement with respect to specific portions hereof. 6 (b) Sections 3 and 4 shall survive termination of this Agreement. 5. Miscellaneous. ------------- (a) This Agreement may not be transferred or assigned by either party, whether voluntarily or by operation of law, without the prior written consent of the other. This Agreement shall inure to the benefit of and be binding upon all permitted successors and assigns. (b) This Agreement shall be governed by the laws of the State of New York (regardless of the laws that might otherwise govern under applicable principles of conflicts of law) as to all matters, including, but not limited to, matters of validity, construction, effect, performance and remedies. (c) This Agreement may be executed in counterparts, each of which shall constitute an original and both of which together shall be deemed to be one and the same instrument. (d) All notices, requests, demands, waivers and other communications required or permitted to be given under this Agreement shall be in writing and shall be deemed to have been duly given if delivered personally or by facsimile transmission or mailed (certified or registered mail, postage prepaid, return receipt requested): If to IDT, to: IDT Corporation 190 Main Street Hackensack, New Jersey 07601 Attention: Chief Financial Officer Fax No.: (201) 907-5165 If to Net2Phone, to: Net2Phone, Inc. 171 Main Street Hackensack, New Jersey 07601 Attention: Chief Financial Officer Fax No.: (201) 907-5351 or to such other person or address as any party shall specify by notice in writing to the other party. All such notices, requests, demands, waivers and communications shall be deemed to have been received on the date on which hand delivered, upon transmission of the facsimile transmission by the sender and issuance by the transmitting machine of a confirmation slip confirming that the number of pages constituting the notice have been transmitted without error, or on the third business day following the date on which so mailed, except for a notice of change of address, which shall be effective only upon receipt thereof. In the case of a notice sent by facsimile transmission, the sender shall contemporaneously mail a copy of the notice to the addressee at the address provided for above. However, such mailing shall in no way alter the 7 time at which the facsimile notice is deemed received. In no event shall the provision of notice pursuant to this Section 5(d) constitute notice for service of process. (e) This Agreement and those provisions of the Separation Agreement (defined below) specifically referred to herein contain the entire understanding of the parties hereto with respect to the subject matter of this Agreement. This Agreement and such referenced provisions of the Separation Agreement supersede all prior agreements and understandings, oral or written, with respect to the subject matter of this Agreement. (f) In the event that any one or more of the provisions contained herein is held invalid or unenforceable in any respect, the parties shall negotiate in good faith with a view toward substituting therefor a suitable and equitable solution in order to carry out the intent and purpose of such invalid provision; provided, however, that the validity and enforceability of any such -------- ------- provision in every other respect and of the remaining provisions contained herein shall not be in any way impaired thereby, it being intended that all of the rights and privileges of the parties hereto shall be enforceable to the fullest extent permitted by law. (g) The Section headings contained in this Agreement are for reference only and shall not affect the meaning or interpretation of this Agreement. (h) IN NO EVENT SHALL EITHER PARTY BE LIABLE TO THE OTHER FOR ANY SPECIAL, INCIDENTAL OR CONSEQUENTIAL DAMAGES (INCLUDING, WITHOUT LIMITATION, LOSS OF PROFITS, REVENUES OR DATA), WHETHER BASED ON BREACH OF CONTRACT, TORT (INCLUDING NEGLIGENCE) OR OTHERWISE, WHETHER OR NOT THAT PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGE. THE LIABILITY OF EITHER PARTY FOR DAMAGES OR ALLEGED DAMAGES HEREUNDER, WHETHER IN CONTRACT, TORT OR ANY OTHER LEGAL THEORY, IS LIMITED TO, AND WILL NOT EXCEED, THE OTHER PARTY'S DIRECT DAMAGES. (i) Any dispute, controversy or claim arising out of or relating to this Agreement or the breach, termination or validity hereof, or any transaction contemplated hereby shall be settled in accordance with the procedures set forth in Article VIII of the Separation Agreement, dated as of May 7, 1999, by and between IDT and Net2Phone, as if such Article VIII were set forth herein in its entirety. 8 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their duly authorized representatives as of the date first above written. IDT CORPORATION By: /s/ Hal Brecher ----------------------------------- Name: Hal Brecher Title: Chief Operating Officer NET2PHONE, INC. By: /s/ Howard Balter ----------------------------------- Name: Howard Balter Title: Chief Executive Officer 9 EX-10.20 3 JOINT MARKETING AGREEMENT EXHIBIT 10.20 JOINT MARKETING AGREEMENT JOINT MARKETING AGREEMENT, dated as of May 7, 1999 (this "Agreement"), by and between IDT Corporation, a Delaware corporation ("IDT"), and Net2Phone, Inc., a Delaware corporation ("Net2Phone"). WHEREAS, Net2Phone is currently a subsidiary of IDT; WHEREAS, Net2Phone and IDT expect that equity interests in Net2Phone may be sold to additional investors; WHEREAS, IDT and Net2Phone have undertaken certain joint advertising and marketing efforts relating to their respective businesses; and WHEREAS, Net2Phone and IDT desire to continue such joint advertising and marketing efforts in accordance with the terms and conditions set forth in this Agreement. NOW, THEREFORE, in consideration of the premises and mutual promises and representations contained herein, and other good and valuable consideration, the sufficiency of which is hereby acknowledged, the parties hereto do mutually covenant, stipulate and agree as follows: Section 1. Joint Advertising and Marketing Efforts. --------------------------------------- Each of Net2Phone and IDT shall (a) continue to offer their respective users links to the other party's website, (b) cross-sell one another's products including through their promotional materials and customer service representatives and (c) undertake such additional promotions as the parties shall agree from time to time. IDT and Net2Phone specifically agree that the form, content and design of any and all advertisements or promotional materials featuring the other party shall continue to be developed by or on behalf of such party and shall be subject to such party's final approval. Section 2. Compensation. ------------ In addition, IDT shall pay to Net2Phone a fee of $8.00 for each customer of Net2Phone who becomes a new customer of IDT as a result of Net2Phone's referral and Net2Phone shall pay to IDT a fee of $8.00 for each customer of IDT who becomes a new customer of Net2Phone as a result of IDT's referral; provided, -------- however, that no such fee shall be due and payable with respect to any such new - ------- customer until such new customer incurs and pays $50.00 in charges to the party responsible for paying the fee hereunder. The parties agree to pay all customer fees due hereunder to the other party as billed. Section 3. Term. ---- 1 The term of this Agreement shall commence on the date hereof and shall continue for a period of two (2) years (the "Initial Term") and, at the end of the Initial Term and of each year thereafter, shall automatically renew for an additional one (1) year period unless one party has given the other party sixty (60) days' prior written notice terminating this Agreement. Following the Initial Term, this Agreement may be terminated by either party upon sixty (60) days' prior written notice. Section 4. Mutual Covenant as to Advertisements. ------------------------------------ Each of IDT and Net2Phone hereby covenants and agrees that their respective marketing and advertising efforts provided for herein shall at all times comply with all applicable laws, rules and regulations and will not contain any material which is obscene, threatening, fraudulent, harassing, libelous, infringing of third party intellectual property rights, otherwise illegal or, in the reasonable judgment of the party required to display the advertisement, offensive. Section 5. Cross-Licensing Provisions. -------------------------- Each Party acknowledges that nothing contained in this Agreement transfers to the other Party any right, title or proprietary interest (including without limitation any intellectual property rights), in any part of the marketing or promotional efforts which are the subject matter hereof, or any proprietary information (including without limitation any trademarks, service marks, trade names, or logos ("Marks"), trade secrets, knowhow, inventions, patents (including any applications, extensions, continuations, renewals and re-issues thereof), copyrights, designs and industrial designs). Each Party hereby grants to the other Party a non-exclusive, limited, worldwide, non-transferable license to use its Marks solely for the purpose of carrying out such other Party's obligations under this Agreement, including without limitation the marketing and promotional activities contemplated by this Agreement. Except as provided herein, no licenses of either Party's Marks are granted or implied under this Agreement. Section 6. Liability. --------- Neither party shall have any liability to the other party for any error, act or omission in connection with the marketing activities to be undertaken pursuant to this Agreement unless any such error, act or omission derives from willful misconduct or gross negligence. IN NO EVENT SHALL EITHER PARTY BE LIABLE TO THE OTHER FOR ANY SPECIAL, INCIDENTAL OR CONSEQUENTIAL DAMAGES (INCLUDING, WITHOUT LIMITATION, LOSS OF PROFITS, REVENUES OR DATA), WHETHER BASED ON BREACH OF CONTRACT, TORT (INCLUDING NEGLIGENCE) OR OTHERWISE, WHETHER OR NOT THAT PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGE. THE LIABILITY OF EITHER PARTY FOR DAMAGES OR ALLEGED DAMAGES HEREUNDER, WHETHER IN CONTRACT, TORT OR ANY OTHER LEGAL THEORY, IS LIMITED TO, AND WILL NOT EXCEED, THE OTHER PARTY'S DIRECT 2 DAMAGES. Section 7. Miscellaneous. ------------- (a) This Agreement may not be transferred or assigned by either party, whether voluntarily or by operation of law, without the prior written consent of the other which consent may be withheld in such party's sole discretion. This Agreement shall inure to the benefit of and be binding upon all permitted successors and assigns. (b) This Agreement shall be governed by the laws of the State of New York (regardless of the laws that might otherwise govern under applicable principles of conflicts of law) as to all matters, including, but not limited to, matters of validity, construction, effect, performance and remedies. (c) This Agreement may be executed in counterparts, each of which shall constitute an original and both of which together shall be deemed to be one and the same instrument. (d) All notices, requests, demands, waivers and other communications required or permitted to be given under this Agreement shall be in writing and shall be deemed to have been duly given if delivered personally or by facsimile transmission or mailed (certified or registered mail, postage prepaid, return receipt requested): If to IDT, to: IDT Corporation 190 Main Street Hackensack, New Jersey 07601 Attention: Chief Financial Officer Fax No.: (201) 907-5165 If to Net2Phone, to: Net2Phone, Inc. 171 Main Street Hackensack, New Jersey 07601 Attention: Chief Financial Officer Fax No.: (201) 907-5351 or to such other person or address as any party shall specify by notice in writing to the other party. All such notices, requests, demands, waivers and communications shall be deemed to have been received on the date on which hand delivered, upon transmission of the facsimile transmission by the sender and issuance by the transmitting machine of a confirmation slip confirming that the number of pages constituting the notice have been transmitted without error, or on the third business day following the date on which so mailed, except for a notice of change of address, which shall be effective only upon receipt thereof. In the case of a notice sent by facsimile transmission, the sender shall contemporaneously mail a copy of the notice to the addressee at the address provided for above. However, such mailing shall in no way alter the time at which the facsimile 3 notice is deemed received. In no event shall the provision of notice pursuant to this Section 7(d) constitute notice for service of process. (e) This Agreement and those provisions of the Separation Agreement (defined below) specifically referred to herein contain the entire understanding of the parties hereto with respect to the subject matter of this Agreement. This Agreement and such referenced provisions of the Separation Agreement supersede all prior agreements and understandings, oral or written, with respect to the subject matter of this Agreement. (f) In the event that any one or more of the provisions contained herein is held invalid or unenforceable in any respect, the parties shall negotiate in good faith with a view toward substituting therefor a suitable and equitable solution in order to carry out the intent and purpose of such invalid provision; provided, however, that the validity and enforceability of any such provision in every other respect and of the remaining provisions contained herein shall not be in any way impaired thereby, it being intended that all of the rights and privileges of the parties hereto shall be enforceable to the fullest extent permitted by law. (g) The Section headings contained in this Agreement are for reference only and shall not affect the meaning or interpretation of this Agreement. (h) Any dispute, controversy or claim arising out of or relating to this Agreement or the breach, termination or validity hereof, or any transaction contemplated hereby shall be settled in accordance with the procedures set forth in Article VIII of the Separation Agreement, dated as of May 7, 1999, by and between IDT and Net2Phone, as if such Article VIII were set forth herein in its entirety. 4 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their duly authorized representatives as of the date first above written. IDT CORPORATION By: /s/ Hal Brecher -------------------------------- Name: Hal Brecher Title: Chief Operating Officer NET2PHONE, INC. By: /s/ Howard Balter -------------------------------- Name: Howard Balter Title: Chief Executive Officer 5 EX-10.21 4 IDT SERVICES AGREEMENT EXHIBIT 10.21 IDT SERVICES AGREEMENT IDT SERVICES AGREEMENT, dated as of May 7, 1999 (this "Agreement"), by and between IDT Corporation, a Delaware corporation ("IDT"), and Net2Phone, Inc., a Delaware corporation ("Net2Phone"). WHEREAS, Net2Phone is currently a subsidiary of IDT and obtains administrative, customer support and other services from IDT; WHEREAS, Net2Phone and IDT expect that equity interests in Net2Phone may be sold to additional investors; and WHEREAS, Net2Phone desires to continue to obtain administrative, customer support and other services from IDT pursuant to the terms hereof and IDT desires to continue to provide such services pursuant to the terms hereof. NOW, THEREFORE, in consideration of the premises and mutual promises and representations contained herein, and other good and valuable consideration, the sufficiency of which is hereby acknowledged, the parties hereto do mutually covenant, stipulate and agree as follows: Section 1. Services. -------- (a) IDT shall render to Net2Phone general accounting services, payroll and benefits administration services, customer support and other services all as more particularly described in Exhibit 1 hereto (collectively, the "Services"). --------- The Services shall be rendered by IDT in conformity with good commercial practice, the terms and conditions of this Agreement and the reasonable instructions of Net2Phone as set forth in this Agreement. (b) Net2Phone shall provide to IDT when required all funds necessary to perform the Services, including, without limitation, all amounts required to pay payroll expenses of employees of Net2Phone and all amounts necessary to pay accounts payable of Net2Phone. (c) IDT shall have no authority pursuant to this Agreement to commit Net2Phone to any obligation in any manner whatsoever with respect to third parties, to use Net2Phone's name in any way or to enter into any contracts on behalf of Net2Phone. (d) In the event that Net2Phone requests services in addition to the Services provided for herein, and if IDT agrees to provide such services, IDT and Net2Phone shall negotiate in good faith a fee for such services, which compensation shall be covered by the final sentence of Section 2(a) hereof; provided, however, that the fee payable by - -------- ------- 1 Net2Phone for such services shall be no less favorable to Net2Phone than the charges for comparable services from unaffiliated third parties. In the event that the parties agree to additional services, the scope and duration of such services, and any termination provisions with respect thereto, shall be described in an addendum to Exhibit 1 and thereafter such services shall be --------- considered Services hereunder. If and to the extent the parties agree to cancel or terminate any of the Services, such services shall be deemed deleted from Exhibit 1, with the remaining services thereafter constituting the Services - --------- hereunder. Section 2. Compensation. ------------ (a) Net2Phone shall pay to IDT a fee for each of the Services equal to the amount set forth in Exhibit 1 corresponding to such service. In the event --------- Net2Phone terminates any Service in accordance with the final sentence of Section 3 hereof, the fee for such Service shall no longer be payable for any period subsequent to the effective date of such termination. In the event the parties agree to additional services, such fee shall be payable as provided herein. (b) Within 15 days following the end of each calendar month, IDT shall submit to Net2Phone for payment a billing invoice setting forth the amount of fees payable by Net2Phone to IDT for Services rendered during such calendar month. Net2Phone shall pay the invoiced amount to IDT within thirty (30) days following receipt of such invoice by Net2Phone. Section 3. Term. ---- The term of this Agreement shall commence on the date hereof and shall continue for a period of one (1) year (the "Initial Term") and, at the end of the Initial Term and of each year thereafter, shall automatically renew for an additional one (1) year period unless one party has given the other party thirty (30) days' prior written notice terminating this Agreement. Following the Initial Term, this Agreement may be terminated at any time at the option of either IDT or Net2Phone upon thirty (30) days' prior written notice. Specific categories of Services may be cancelled as set forth in Exhibit 1. --------- Section 4. Records and Accounts. -------------------- IDT shall maintain accurate records and accounts of all transactions relating to the Services performed by it pursuant to this Agreement. Such records and accounts shall be maintained separately from IDT's own records and accounts and shall reflect such information as would normally be examined by an independent accountant in performing a complete audit pursuant to United States generally accepted auditing standards for the purpose of certifying financial statements, and to permit verification thereof by 2 governmental agencies. Net2Phone shall have the right to inspect and copy, upon reasonable notice and at reasonable intervals during IDT's regular office hours, the separate records and accounts maintained by IDT relating to the Services. Section 5. Directors and Officers of Net2Phone and IDT. ------------------------------------------- (a) Nothing contained in this Agreement shall be deemed to relieve the officers and directors of Net2Phone from the performance of their duties or limit the exercise of their powers in accordance with Net2Phone's Certificate of Incorporation or the laws of the State of Delaware. The services of IDT's officers and employees which are rendered to Net2Phone under this Agreement shall at all times be in accordance with the reasonable instructions of Net2Phone's officers and in accordance with IDT's historical business practice. (b) Nothing in this Agreement shall limit or restrict the right of any of IDT's directors, officers or employees to engage in any other business or devote their time and attention in part to the management or other aspects of any other business, whether of a similar nature, or to limit or restrict the right of IDT to engage in any other business or to render services of any kind to any corporation, firm, individual, trust or association; provided, however, -------- ------- that the foregoing shall in no way modify or limit IDT's agreement not to compete with Net2Phone as set forth in Section 6.3 of the Separation Agreement between IDT and Net2Phone, dated the date hereof (the "Separation Agreement"), and IDT hereby confirms its agreement to be bound by the terms thereof.. Section 6. Liability; Indemnification. -------------------------- (a) IDT shall have no liability whatsoever to Net2Phone for any error, act or omission in connection with the services to be rendered by IDT to Net2Phone hereunder unless any such error, act or omission derives from willful misconduct or gross negligence. The parties acknowledge that Article VIII of the Separation Agreement provides for indemnification obligations relating to this Agreement and confirm their agreement to be bound by the terms thereof. IN NO EVENT SHALL IDT BE LIABLE TO NET2PHONE FOR ANY SPECIAL, INCIDENTAL OR CONSEQUENTIAL DAMAGES (INCLUDING, WITHOUT LIMITATION, LOSS OF PROFITS, REVENUES OR DATA), WHETHER BASED ON BREACH OF CONTRACT, TORT (INCLUDING NEGLIGENCE) OR OTHERWISE, WHETHER OR NOT IDT HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGE. THE LIABILITY OF IDT FOR DAMAGES OR ALLEGED DAMAGES HEREUNDER, WHETHER IN CONTRACT, TORT OR ANY OTHER LEGAL THEORY, IS LIMITED TO, AND WILL NOT EXCEED, NET2PHONE'S DIRECT DAMAGES. (b) IDT is an independent contractor and when its employees act under the terms of this Agreement, they shall be deemed at all times to be under the supervision and responsibility of IDT; and, notwithstanding any reimbursement of labor costs as provided 3 herein or otherwise, no person employed by IDT and acting under the terms of this Agreement shall be deemed to be acting as agent or employee of Net2Phone or any customer of Net2Phone for any purpose whatsoever. Section 7. Other Agreements. ---------------- From time to time, Net2Phone may find it necessary or desirable either to enter into agreements covering services of the type contemplated by this Agreement to be provided by parties other than IDT or to enter into other agreements covering functions to be performed by IDT hereunder. Nothing in this Agreement shall be deemed to limit in any way the right of Net2Phone to acquire such services from others or to enter into such other agreements; provided that -------- in no such event shall the compensation to be paid to IDT pursuant to Section 2 hereof be reduced on account thereof unless and until this Agreement is terminated, or the applicable category of Services set forth in Exhibit 1, is --------- cancelled in accordance with Section 3 hereof and Exhibit 1 hereto. --------- Section 8. Confidentiality. --------------- IDT agrees to hold in strict confidence, and to use reasonable efforts to cause its employees and representatives to hold in strict confidence, all confidential information concerning Net2Phone furnished to or obtained by IDT in the course of providing the Services (except to the extent that such information has been (a) in the public domain through no fault of IDT or (b) lawfully acquired by IDT from sources other than Net2Phone); and IDT shall not disclose or release any such confidential information to any person, except its employees, representatives and agents who have a need to know such information in connection with IDT's performance under this Agreement, unless (i) such disclosure or release is compelled by the judicial or administrative process, or (ii) in the opinion of counsel to IDT, such disclosure or release is necessary pursuant to requirements of law or the requirements of any governmental entity including, without limitation, disclosure requirements under the Securities Act of 1933 or the Securities Exchange Act of 1934, in each case as amended. Section 9. Miscellaneous. ------------- (a) This Agreement may not be transferred or assigned by either party, whether voluntarily or by operation of law, without the prior written consent of the other which consent may be withheld in such party's sole discretion. This Agreement shall inure to the benefit of and be binding upon all permitted successors and assigns. (b) This Agreement shall be governed by the laws of the State of New York (regardless of the laws that might otherwise govern under applicable principles of conflicts of law) as to all matters, including, but not limited to, matters of validity, construction, effect, performance and remedies. 4 (c) This Agreement may be executed in counterparts, each of which shall constitute an original and both of which together shall be deemed to be one and the same instrument. (d) All notices, requests, demands, waivers and other communications required or permitted to be given under this Agreement shall be in writing and shall be deemed to have been duly given if delivered personally or by facsimile transmission or mailed (certified or registered mail, postage prepaid, return receipt requested): If to IDT, to: IDT Corporation 190 Main Street Hackensack, New Jersey 07601 Attention: Chief Financial Officer Fax No.: (201) 907-5165 If to Net2Phone, to: Net2Phone, Inc. 171 Main Street Hackensack, New Jersey 07601 Attention: Chief Financial Officer Fax No.: (201) 907-5351 or to such other person or address as any party shall specify by notice in writing to the other party. All such notices, requests, demands, waivers and communications shall be deemed to have been received on the date on which hand delivered, upon transmission of the facsimile transmission by the sender and issuance by the transmitting machine of a confirmation slip confirming that the number of pages constituting the notice have been transmitted without error, or on the third business day following the date on which so mailed, except for a notice of change of address, which shall be effective only upon receipt thereof. In the case of a notice sent by facsimile transmission, the sender shall contemporaneously mail a copy of the notice to the addressee at the address provided for above. However, such mailing shall in no way alter the time at which the facsimile notice is deemed received. In no event shall the provision of notice pursuant to this Section 9(d) constitute notice for service of process. (e) This Agreement and those provisions of the Separation Agreement specifically referred to herein contain the entire understanding of the parties hereto with respect to the subject matter of this Agreement. This Agreement and such referenced provisions of the Separation Agreement supersede all prior agreements and understandings, oral or written, with respect to the subject matter of this Agreement. (f) The provisions of Sections 6 and 8 hereof shall survive any termination of this Agreement. (g) In the event that any one or more of the provisions contained herein is held invalid or unenforceable in any respect, the parties shall negotiate in good faith with a 5 view toward substituting therefor a suitable and equitable solution in order to carry out the intent and purpose of such invalid provision; provided, however, that the validity and enforceability of any such provision in every other respect and of the remaining provisions contained herein shall not be in any way impaired thereby, it being intended that all of the rights and privileges of the parties hereto shall be enforceable to the fullest extent permitted by law. (h) The Section headings contained in this Agreement are for reference only and shall not affect the meaning or interpretation of this Agreement. (i) Any dispute, controversy or claim arising out of or relating to this Agreement or the breach, termination or validity hereof, or any transaction contemplated hereby shall be settled in accordance with the procedures set forth in Article VIII of the Separation Agreement as if such Article VIII were set forth herein in its entirety. 6 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date set forth above. IDT CORPORATION By: /s/ Hal Brecher -------------------------------- Name: Hal Brecher Title: Chief Operating Officer NET2PHONE, INC. By: /s/ Howard Balter -------------------------------- Name: Howard Balter Title: Chief Executive Officer 7 Exhibit 1 --------- Services to be Provided by IDT to Net2Phone General Accounting Services - --------------------------- Accounts payable and general ledger services, similar to those furnished by IDT to Net2Phone as of the date of this Agreement, will be provided by IDT to Net2Phone. Such Services will consist of, among other things, the following: (a) receipt and opening of all vendor mail; (b) maintenance of a vendor master file; (c) processing and forwarding payment of all vendor invoices; (d) invoice exception reporting and resolution; (e) monthly financial reporting; (f) vendor relations; and (g) processing credit card transactions. This category of Services may be cancelled, in whole or in part, by either party on thirty (30) days' prior written notice. Amount to be paid by Net2Phone: ------------------------------ (a) Employee Cost: for each IDT employee assigned to render the ------------- foregoing services, such employee's salary for the month multiplied by the percentage of such employee's work month actually spent rendering such Services (such percentage to be calculated based upon time-cards or some other mutually agreed upon system); plus (b) Overhead Factor: 20% of each product calculated in (a) above. ---------------- Payroll and Benefit Administration - ---------------------------------- IDT will administer Net2Phone's payroll. IDT will also continue to include Net2Phone's employees under IDT's group health insurance policies until Net2Phone has established its own benefit plan for its employees with respect to group health insurance or, if sooner, the termination of this Agreement. In addition to the cost of administration of such group health insurance, Net2Phone will reimburse IDT for the employer's monthly costs of health insurance attributable to each eligible Net2Phone employee participating in IDT's health insurance plan. Further, IDT will continue to permit Net2Phone's employees to participate in IDT's 401(k) Savings and Retirement Plan until the termination of this Agreement or such earlier time as Net2Phone establishes its own 401(k) for its employees which Net2Phone agrees to do on or prior to the date on which IDT ceases to own at least 80% of the stock of Net2Phone. In addition to the cost of administration of such 401(k) plan, Net2Phone will reimburse IDT for the employer's matching contribution and other direct costs attributable to each eligible Net2Phone employee participating in IDT's 401(k) plan. 1 This category of Services may be cancelled, in whole or in part, by either party on thirty (30) days' prior written notice. Amount to be paid by Net2Phone: ------------------------------ (a) Employee Cost: for each IDT employee assigned to render the ------------- administration of payroll and benefits plans, such employee's salary for the month multiplied by the percentage of such employee's work month actually spent rendering such Services (such percentage to be calculated based upon time-cards or some other mutually agreed upon system); plus (b) Overhead Factor: 20% of each product calculated in (a) above; ---------------- plus (c) Direct Costs: reimbursement of IDT's direct costs as set forth ------------- above. Customer Support - ---------------- IDT shall provide customer support for Net2Phone's Phone2Phone customers which shall include answering all customer inquiries (such as billing inquiries), payment processing, rate questions, accommodating dissatisfied customers, providing technical feedback to Network Operations Center about any quality or technical problems and offering e-mail support. Customer service support will be available 24 hours per day, seven days per week. Sales support will be available 16 hours per day, five days per week. This category of Services may be cancelled by either party on thirty (30) days' prior written notice. Amount to be paid by Net2Phone: ------------------------------ (a) Employee Cost: for each IDT employee assigned to render the ------------- foregoing services, such employee's salary for the month multiplied by the percentage of such employee's work month actually spent rendering such Services (such percentage to be calculated based upon time-cards or some other mutually agreed upon system); plus (b) Overhead Factor: 20% of each product calculated in (a) above. ---------------- LAN Services - ------------ IDT shall provide Local Area Network services to Net2Phone, including all maintenance, installation of new hardware and software (or upgrades thereto) and consultation on acquisition of new equipment. This category of Services may be cancelled by either party on thirty (30) days' prior 2 written notice. Amount to be paid by Net2Phone: ------------------------------ (a) Employee Cost: for each IDT employee assigned to render the ------------- foregoing services, such employee's salary for the month multiplied by the percentage of such employee's work month actually spent rendering such Services (such percentage to be calculated based upon time-cards or some other mutually agreed upon system); plus (b) Overhead Factor: 20% of each product calculated in (a) above. ---------------- 3 EX-10.22 5 NET2PHONE SERVICES AGREEMENT, DATED MAY 7, 1999. EXHIBIT 10.22 NET2PHONE SERVICES AGREEMENT NET2PHONE SERVICES AGREEMENT, dated as of May 7, 1999 (this "Agreement"), by and between IDT Corporation, a Delaware corporation ("IDT"), and Net2Phone, Inc., a Delaware corporation ("Net2Phone"). WHEREAS, Net2Phone is currently a subsidiary of IDT and provides certain services to IDT; WHEREAS, Net2Phone and IDT expect that equity interests in Net2Phone may be sold to additional investors; and WHEREAS, IDT desires to continue to obtain services from Net2Phone pursuant to the terms hereof and Net2Phone desires to continue to provide such services pursuant to the terms hereof. NOW, THEREFORE, in consideration of the premises and mutual promises and representations contained herein, and other good and valuable consideration, the sufficiency of which is hereby acknowledged, the parties hereto do mutually covenant, stipulate and agree as follows: Section 1. Services. -------- (a) Net2Phone shall render to IDT the services described in Exhibit 1 --------- hereto (collectively, the "Services"). The Services shall be rendered by Net2Phone in conformity with good commercial practice, the terms and conditions of this Agreement and the reasonable instructions of IDT as set forth in this Agreement. (b) IDT shall provide to Net2Phone when required all funds, if any, necessary to perform the Services. (c) Net2Phone shall have no authority pursuant to this Agreement to commit IDT to any obligation in any manner whatsoever with respect to third parties, to use IDT's name in any way or to enter into any contracts on behalf of IDT. (d) In the event that IDT requests services in addition to the Services provided for herein, and if Net2Phone agrees to provide such services, IDT and Net2Phone shall negotiate in good faith a fee for such services, which compensation shall be covered by the final sentence of Section 2(a) hereof; provided, however, that the fee payable by IDT for such services shall be no - -------- ------- less favorable to IDT than the charges for comparable services from unaffiliated third parties. In the event that the parties agree to additional services, the scope and duration of such services, and any termination provisions with 1 respect thereto, shall be described in an addendum to Exhibit 1 and thereafter --------- such services shall be considered Services hereunder. If and to the extent the parties agree to cancel or terminate any of the Services, such services shall be deemed deleted from Exhibit 1, with the remaining services thereafter --------- constituting the Services hereunder. Section 2. Compensation. ------------ (a) IDT shall pay to Net2Phone a fee for each of the Services equal to the amount set forth in Exhibit 1 corresponding to such service. In the event --------- IDT terminates any Service in accordance with the final sentence of Section 3 hereof, the fee for such Service shall no longer be payable for any period subsequent to the effective date of such termination. In the event the parties agree to additional services, such fee shall be payable as provided herein. (b) Within 15 days following the end of each calendar month, Net2Phone shall submit to IDT for payment a billing invoice setting forth the amount of fees payable by IDT to Net2Phone for Services rendered during such calendar month. IDT shall pay the invoiced amount to Net2Phone within thirty (30) days following receipt of such invoice by IDT. Section 3. Term. ---- The term of this Agreement shall commence on the date hereof and shall continue for a period of one (1) year (the "Initial Term") and, at the end of the Initial Term and of each year thereafter, shall automatically renew for an additional one (1) year period unless one party has given the other party thirty (30) days' prior written notice terminating this Agreement. Following the Initial Term, this Agreement may be terminated at any time at the option of either IDT or Net2Phone upon thirty (30) days' prior written notice. Specific categories of Services may be cancelled as set forth in Exhibit 1. --------- Section 4. Records and Accounts. -------------------- Net2Phone shall maintain accurate records and accounts of all transactions relating to the Services performed by it pursuant to this Agreement. Such records and accounts shall be maintained separately from Net2Phone's own records and accounts and shall reflect such information as would normally be examined by an independent accountant in performing a complete audit pursuant to United States generally accepted auditing standards for the purpose of certifying financial statements, and to permit verification thereof by governmental agencies. IDT shall have the right to inspect and copy, upon reasonable notice and at reasonable intervals during Net2Phone's regular office hours, the separate records and accounts maintained by Net2Phone relating to the Services. Section 5. Directors and Officers of Net2Phone and IDT. ------------------------------------------- 2 (a) Nothing contained in this Agreement shall be deemed to relieve the officers and directors of IDT from the performance of their duties or limit the exercise of their powers in accordance with IDT's Certificate of Incorporation or the laws of the State of Delaware. The services of Net2Phone's officers and employees which are rendered to IDT under this Agreement shall at all times be in accordance with the reasonable instructions of IDT's officers and in accordance with Net2Phone's historical business practice. (b) Nothing in this Agreement shall limit or restrict the right of any of Net2Phone's directors, officers or employees to engage in any other business or devote their time and attention in part to the management or other aspects of any other business, whether of a similar nature, or to limit or restrict the right of Net2Phone to engage in any other business or to render services of any kind to any corporation, firm, individual, trust or association. Section 6. Liability; Indemnification. -------------------------- (a) Net2Phone shall have no liability whatsoever to IDT for any error, act or omission in connection with the services to be rendered by Net2Phone to IDT hereunder unless any such error, act or omission derives from willful misconduct or gross negligence. The parties acknowledge that Article VIII of the Separation Agreement between the parties hereto, dated the date hereof (the "Separation Agreement") provides for indemnification obligations relating to this Agreement and confirm their agreement to be bound by the terms thereof. IN NO EVENT SHALL NET2PHONE BE LIABLE TO IDT FOR ANY SPECIAL, INCIDENTAL OR CONSEQUENTIAL DAMAGES (INCLUDING, WITHOUT LIMITATION, LOSS OF PROFITS, REVENUES OR DATA), WHETHER BASED ON BREACH OF CONTRACT, TORT (INCLUDING NEGLIGENCE) OR OTHERWISE, WHETHER OR NOT NET2PHONE HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGE. THE LIABILITY OF NET2PHONE FOR DAMAGES OR ALLEGED DAMAGES HEREUNDER, WHETHER IN CONTRACT, TORT OR ANY OTHER LEGAL THEORY, IS LIMITED TO, AND WILL NOT EXCEED, IDT'S DIRECT DAMAGES. (b) Net2Phone is an independent contractor and when its employees act under the terms of this Agreement, they shall be deemed at all times to be under the supervision and responsibility of Net2Phone; and, notwithstanding any reimbursement of labor costs as provided herein or otherwise, no person employed by Net2Phone and acting under the terms of this Agreement shall be deemed to be acting as agent or employee of IDT or any customer of IDT for any purpose whatsoever. Section 7. Other Agreements. ---------------- From time to time, IDT may find it necessary or desirable either to enter into agreements covering services of the type contemplated by this Agreement to be provided by parties other than Net2Phone or to enter into other agreements covering functions to be performed by Net2Phone hereunder. Nothing in this Agreement shall be deemed to 3 limit in any way the right of IDT to acquire such services from others or to enter into such other agreements; provided that in no such event shall the -------- compensation to be paid to Net2Phone pursuant to Section 2 hereof be reduced on account thereof unless and until this Agreement is terminated, or the applicable category of Services set forth in Exhibit 1, is cancelled in accordance with --------- Section 3 and Exhibit 1 hereto. --------- Section 8. Confidentiality. --------------- Net2Phone agrees to hold in strict confidence, and to use reasonable efforts to cause its employees and representatives to hold in strict confidence, all confidential information concerning IDT furnished to or obtained by Net2Phone in the course of providing the Services (except to the extent that such information has been (a) in the public domain through no fault of Net2Phone or (b) lawfully acquired by Net2Phone from sources other than IDT); and Net2Phone shall not disclose or release any such confidential information to any person, except its employees, representatives and agents who have a need to know such information in connection with Net2Phone's performance under this Agreement, unless (i) such disclosure or release is compelled by the judicial or administrative process, or (ii) in the opinion of counsel to Net2Phone, such disclosure or release is necessary pursuant to requirements of law or the requirements of any governmental entity including, without limitation, disclosure requirements under the Securities Act of 1933 or the Securities Exchange Act of 1934, in each case as amended. Section 9. Miscellaneous. ------------- (a) This Agreement may not be transferred or assigned by either party, whether voluntarily or by operation of law, without the prior written consent of the other which consent may be withheld in such party's sole discretion. This Agreement shall inure to the benefit of and be binding upon all permitted successors and assigns. (b) This Agreement shall be governed by the laws of the State of New York (regardless of the laws that might otherwise govern under applicable principles of conflicts of law) as to all matters, including, but not limited to, matters of validity, construction, effect, performance and remedies. (c) This Agreement may be executed in counterparts, each of which shall constitute an original and both of which together shall be deemed to be one and the same instrument. (d) All notices, requests, demands, waivers and other communications required or permitted to be given under this Agreement shall be in writing and shall be deemed to have been duly given if delivered personally or by facsimile transmission or mailed (certified or registered mail, postage prepaid, return receipt requested): If to IDT, to: IDT Corporation 190 Main Street Hackensack, New Jersey 07601 4 Attention: Chief Financial Officer Fax No.: (201) 907-5165 If to Net2Phone, to: Net2Phone, Inc. 171 Main Street Hackensack, New Jersey 07601 Attention: Chief Financial Officer Fax No.: (201) 907-5351 or to such other person or address as any party shall specify by notice in writing to the other party. All such notices, requests, demands, waivers and communications shall be deemed to have been received on the date on which hand delivered, upon transmission of the facsimile transmission by the sender and issuance by the transmitting machine of a confirmation slip confirming that the number of pages constituting the notice have been transmitted without error, or on the third business day following the date on which so mailed, except for a notice of change of address, which shall be effective only upon receipt thereof. In the case of a notice sent by facsimile transmission, the sender shall contemporaneously mail a copy of the notice to the addressee at the address provided for above. However, such mailing shall in no way alter the time at which the facsimile notice is deemed received. In no event shall the provision of notice pursuant to this Section 9(d) constitute notice for service of process. (e) This Agreement and those provisions of the Separation Agreement specifically referred to herein contain the entire understanding of the parties hereto with respect to the subject matter of this Agreement. This Agreement and such referenced provisions of the Separation Agreement supersede all prior agreements and understandings, oral or written, with respect to the subject matter of this Agreement. (f) The provisions of Sections 6 and 8 hereof shall survive any termination of this Agreement. (g) In the event that any one or more of the provisions contained herein is held invalid or unenforceable in any respect, the parties shall negotiate in good faith with a view toward substituting therefor a suitable and equitable solution in order to carry out the intent and purpose of such invalid provision; provided, however, that the validity and enforceability of any such provision in every other respect and of the remaining provisions contained herein shall not be in any way impaired thereby, it being intended that all of the rights and privileges of the parties hereto shall be enforceable to the fullest extent permitted by law. (h) The Section headings contained in this Agreement are for reference only and shall not affect the meaning or interpretation of this Agreement. (i) Any dispute, controversy or claim arising out of or relating to this Agreement or the breach, termination or validity hereof, or any transaction contemplated hereby shall be settled in accordance with the procedures set forth in Article VIII of the Separation 5 Agreement as if such Article VIII were set forth herein in its entirety. 6 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date set forth above. IDT CORPORATION By: /s/ Hal Brecher -------------------------------- Name: Hal Brecher Title: Chief Operating Officer NET2PHONE, INC. By: /s/ Howard Balter -------------------------------- Name: Howard Balter Title: Chief Executive Officer 7 Exhibit 1 --------- Services to be Provided by Net2Phone to IDT Debit Card Platform Services - ---------------------------- Net2Phone shall support IDT's Debit Card Platform including: (1) providing technical support for the debit card platform; (2) ordering lines to handle calls (WorldCom, Piscataway, etc.); (3) managing database for the platform; and (4) monitoring network, 24 hours per day, seven days per week. IDT shall be responsible for the cost of any and all additional or replacement equipment needed for the Debit Card Platform and shall be responsible for the cost of maintaining and supporting all existing or new equipment required for the Debit Card Platform. IDT shall reimburse Net2Phone for any cost incurred by Net2Phone in the acquisition, maintenance or support of such equipment. This category of Services may be cancelled by either party on thirty (30) days' prior written notice and may be renewed by mutual agreement of the parties. Amount to be paid by IDT: ------------------------ (a) Direct Costs: reimbursement of Net2Phone's direct costs as set forth ------------ above; plus (b) On a monthly basis, the greater of: (i) (A) Employee Cost: for each Net2Phone employee assigned to ------------- render the foregoing services, such employee's salary for the month multiplied by the percentage of such employee's work month actually spent rendering such Services (such percentage to be calculated based upon time-cards or some other mutually agreed upon system) plus (B) Overhead Factor of 20% of each product calculated in the foregoing --------------- clause (A) or (ii) Usage of Debit Card Platform: $.0025 per minute of IDT use of ----------------------------- the Debit Card Platform during such month. 8 EX-10.23 6 ASSIGNMENT AGREEMENT EXHIBIT 10.23 ASSIGNMENT AGREEMENT This Assignment Agreement (this "Agreement") is made as of May 7, 1999 (the "Effective Date"), by and between IDT Corporation, a Delaware corporation with its principal place of business at 190 Main Street, Hackensack, New Jersey 07601 ("Assignor"), and Net2Phone, Inc., a Delaware corporation with its principal place of business at 171 Main Street, Hackensack, New Jersey 07601 ("Assignee") (hereinafter referred to collectively as the "Parties" and individually as a "Party"). RECITALS WHEREAS, Assignor has heretofore irrevocably transferred and assigned to Assignee all of its rights, title and interest, on a worldwide basis, including, without limitation, all intellectual property rights and moral rights, in and to certain proprietary products, patent applications and proprietary information set forth herein (excluding any trademark rights) as part of its initial and original capital contribution in Assignee, and the Parties wish to memorialize such transfer and assignment in this Agreement; WHEREAS, Assignor desires and agrees to irrevocably assign to Assignee as of the Effective Date all of its rights, title and interest, on a worldwide basis, including, without limitation, all intellectual property rights and moral rights, in and to certain proprietary products, patent applications and proprietary information, as set forth herein, that otherwise have not been transferred and assigned to Assignee prior to the Effective Date, as well as certain trademark rights as set forth herein; WHEREAS, except for any ownership interest already held by Assignee, Assignor is the sole owner of all rights, title and interest, including, without limitation, all intellectual property rights, in and to such proprietary products, patents, trademarks, proprietary information and proprietary business information; and, with respect to the trademarks, Assignee is a successor to a portion of the business of the Assignor to which these trademarks pertain; WHEREAS, Assignor has agreed to irrevocably assign to Assignee all of its rights, title and interest on a worldwide basis, including, without limitation, all intellectual property rights and moral rights, in and to certain non- proprietary products set forth herein to the full extent that Assignor has a license for such rights and subject to and contingent upon Assignor having the right and necessary consents to assign such license; WHEREAS, Assignor is a licensee of certain rights in and to such non- proprietary products; WHEREAS, Assignor has agreed to license to Assignee certain rights in and to certain proprietary business information relating to the business operations of Assignee and the combined business operations of Assignor and Assignee; and WHEREAS, to enable Assignor to continue its current use of certain proprietary products, Assignee is willing to grant to Assignor a license back to certain rights in such proprietary products as set forth herein; NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties hereby agree as follows: 1 AGREEMENT 1. DEFINITIONS For the purposes of this Agreement, the following terms will have the meanings ascribed to them as follows: 1.1 "Assigned Property" means the Proprietary Products, Proprietary Information, Third Party Products, Trademarks and Patents. 1.2 "Patents" means the patent applications set forth in Exhibit C. 1.3 "Price" means a one-time payment of one dollar (US$1). 1.4 "Proprietary Business Information" means any confidential or proprietary information, know-how, or trade secret described or comprised in or relating to the general business operations of Assignee, excluding Proprietary Information (but including, without limitation, access to the carrier minutes report manager, call costing and payments settlement system and similar databases to the extent related to and appropriate for the operation of Assignee's business), that exists as of the Effective Date or that is subsequently provided by Assignor to Assignee at its sole discretion, and that is not in the public domain or regularly disclosed by Assignor to third parties without confidentiality restrictions. 1.5 "Proprietary Information" means any confidential or proprietary information, know-how, or trade secret described or comprised in or relating to the Assigned Property that is not in the public domain or regularly disclosed by Assignee to third parties without confidentiality restrictions. 1.6 "Proprietary Products" means the products set forth in Exhibit A, including, without limitation, all user manuals, reference manuals and other documentation and materials relating thereto; and any derivative works, foreign language versions, fixes, upgrades, updates, enhancements, new versions or previous versions thereof. 1.7 "Trademarks" means the product marks and logos set forth in Exhibit D and all rights and goodwill associated therewith. 1.8 "Third Party Products" means a mutually agreed upon subset of products selected by the Parties from among the products set forth in Exhibit B (and such additional similar products as the Parties may mutually agree), including, without limitation, any software and firmware relating thereto; all user manuals, reference manuals and other documentation and materials relating thereto; and any derivative works, foreign language versions, fixes, upgrades, updates, enhancements, new versions or previous versions thereof provided by the third-party licensor of such products to Assignor. 2. ASSIGNMENT Assignor hereby irrevocably assigns, conveys, sells, grants and transfers and agrees to assign, convey, sell, grant and transfer to Assignee the following rights (collectively, the "Rights"): 2.1 Proprietary Products. Subject to the terms and conditions of this -------------------- Agreement, Assignor hereby irrevocably assigns, conveys, sells, grants and transfers and agrees to assign, convey, sell, grant 2 and transfer to Assignee, its successors and assigns all of its rights, title and interest of every kind and character throughout the world in and to the Proprietary Products to the full extent of its ownership or interest therein; including, without limitation, all federal, state, foreign, statutory and common law and other rights in patents, copyrights, moral rights, trademarks, trade secrets, know- how, design rights and all other intellectual property and proprietary rights therein; all domestic and foreign intellectual property applications and registrations therefor (and all divisions, continuations, continuations-in-part, reexaminations, substitutions, reissues, extensions, and renewals of such applications and registrations, and the right to apply for any of the foregoing); all goodwill associated therewith; all rights to causes of action and remedies related thereto (including, without limitation, the right to sue for past, present or future infringement, misappropriation or violation of rights related to the foregoing); and any and all other rights and interests arising out of, in connection with or in relation to the Proprietary Products. Upon Assignee's reasonable request, Assignor will promptly take such actions, including, without limitation, the prompt execution and delivery of documents in recordable form, as may be reasonably necessary to vest, secure, perfect, protect or enforce the rights and interests of Assignee in and to the Proprietary Products. 2.2 Proprietary Information. Subject to the terms and conditions of this ----------------------- Agreement, Assignor hereby irrevocably assigns, conveys, sells, grants and transfers and agrees to assign, convey, sell, grant and transfer to Assignee, its successors and assigns all of its rights, title and interest of every kind and character throughout the world, including moral rights, in and to the Proprietary Information to the full extent of its ownership or interest therein; including, without limitation, all intellectual property and proprietary rights therein, all goodwill associated therewith, all rights to causes of action and remedies related thereto (including, without limitation, the right to sue for past, present or future infringement, misappropriation or violation of rights related to the foregoing), and any and all other rights and interests arising out of, in connection with or in relation to the Proprietary Information. 2.3 Third Party Products. Subject to the terms and conditions of this -------------------- Agreement, and subject to and contingent upon Assignor obtaining any necessary and applicable third party consents, Assignor hereby irrevocably assigns, conveys, sells, grants and transfers and agrees to assign, convey, sell, grant and transfer to Assignee, its successors and assigns all rights, title and interest of every kind and character throughout the world, including moral rights, in and to the Third Party Products and any license agreements related thereto to the full extent of Assignor's rights or interest therein (if any). Upon Assignee's request, Assignor will promptly take such actions, including, without limitation, the prompt execution and delivery of documents in recordable form, as may be reasonably necessary to vest, secure, perfect, protect or enforce the rights and interests of Assignee in and to the Third Party Products and any license agreements related thereto. 2.4 Patents. Subject to the terms and conditions of this Agreement, ------- Assignor hereby irrevocably assigns, conveys, sells, grants and transfers and agrees to assign, convey, sell, grant and transfer to Assignee, its successors and assigns all of its rights, title and interest of every kind and character throughout the world, including moral rights, in and to the Patents to the full extent of its ownership or interest therein; including, without limitation, all domestic and foreign patent applications and registrations therefor (and all patents that issue therefrom and all divisions, continuations, continuations-in-part, reexaminations, substitutions, reissues, extensions, and renewals of such applications, registrations and patents, and the right to apply for any of the foregoing); all goodwill associated therewith; all rights to causes of action and remedies related thereto (including, without limitation, the right to sue for past, present or future infringement, 3 misappropriation or violation of rights related to the foregoing); and any and all other rights and interests arising out of, in connection with or in relation to the Patents. Upon Assignee's request, Assignor will promptly take such actions, including, without limitation, the prompt execution and delivery of documents in recordable form, as may be reasonably necessary to vest, secure, perfect, protect or enforce the rights and interests of Assignee in and to the Patents. 2.5 Trademarks. Subject to the terms and conditions of this Agreement, ---------- Assignor hereby irrevocably assigns, conveys, sells, grants and transfers and agrees to assign, convey, sell, grant and transfer to Assignee, its successors and assigns all of its rights, title and interest of every kind and character throughout the world, including moral rights, in and to the Trademarks to the full extent of its ownership or interest therein; including, without limitation, all federal, state, foreign, statutory and common law and other rights; all domestic and foreign trademark applications and registrations therefor (and all extensions and renewals of such applications and registrations, and the right to apply for any of the foregoing); all goodwill associated therewith symbolized by the Trademarks and the portion of the business of the Assignor to which the Trademarks pertain; all rights to causes of action and remedies related thereto (including, without limitation, the right to sue for past, present or future infringement, misappropriation or violation of rights related to the foregoing); and any and all other rights and interests arising out of, in connection with or in relation to the Trademarks. The Parties agree to have executed and file the confirmatory assignment with respect to the Trademarks attached hereto as Exhibit F. Upon Assignee's request, Assignor will promptly take such other actions, including, without limitation, the prompt execution and delivery of documents in recordable form, as may be reasonably necessary to vest, secure, perfect, protect or enforce the rights and interests of Assignee in and to the Trademarks. 2.6 Further Assurances For Third Party Products. Assignor and Assignee ------------------------------------------- will use their respective reasonable best efforts to obtain any consent, approval or amendment required to novate and/or assign the Third Party Products; provided, however, that, except for filing and -------- ------- other administrative charges, Assignee shall not be obligated to pay any consideration therefor to the third party from whom such consents, approvals and amendments are requested. In the event and to the extent that Assignee and Assignor are unable to obtain any such required consent, approval or amendment, or if any attempted assignment would be ineffective or would adversely affect the rights of Assignor with respect to any Third Party Product so that Assignee would not in fact receive all the rights with respect to such Third Party Product, Assignor and Assignee will cooperate (to the extent permitted by law or the terms of any applicable agreement) in a mutually agreeable arrangement under which Assignee would, to the extent possible and permissible under any applicable agreement, obtain the benefits and assume the obligations with respect to such Third Party Product, in accordance with this Agreement, including sub-contracting, sub- licensing, or sub-leasing to Assignee, or under which Assignor would enforce for the benefit of Assignee, with Assignee assuming Assignor's obligations, any and all rights of Assignor against a third party thereto. Assignor shall, without further consideration therefor, pay and remit to Assignee promptly all monies, rights and other considerations received in respect to Assignee's performance of such obligations and Assignee shall remit to Assignor (or pay directly) all amounts due with respect to such Third Party Products to such third parties. If and when any such consent shall be obtained or such Third Party Product shall otherwise become assignable or able to be novated, Assignor shall promptly assign and novate all of its rights and obligations thereunder to Assignee without payment of further consideration and Assignee shall, without the payment of any further consideration therefor, assume such rights and obligations and Assignor shall be relieved of any and all liability hereunder. 4 3. LICENSE 3.1 Subject to the terms and conditions of this Agreement, Assignor hereby grants and agrees to grant to Assignee a worldwide, royalty- free, fully paid up, perpetual, irrevocable, nonexclusive, transferable right and license (with the right to sublicense) to copy and use Proprietary Business Information for the purposes of conducting Assignee's business; provided, however, Assignee takes such steps as are reasonably necessary to protect Assignor's rights in the Proprietary Business Information, including by providing the same protection that Assignor affords to Proprietary Business Information and by treating Proprietary Business Information as confidential information, if appropriate. 3.2 Subject to the terms and conditions of this Agreement, Assignee hereby grants and agrees to grant to Assignor a worldwide, royalty- free, fully paid up, perpetual, irrevocable, non-exclusive license to use the products identified in Exhibit E only for internal use by and for Assignor. Assignor will not assign, sublicense, resell, rent, distribute or provide service-bureau timesharing or related services with respect to the products identified in Exhibit E or the license granted in this Section 3.2 . 4. PAYMENT As payment for the assignment of Rights and the license granted pursuant to Sections 2 and 3, Assignee will pay to Assignor the Price, the receipt and full satisfaction of which is hereby acknowledged by the Parties. 5. REPRESENTATIONS AND WARRANTIES UNLESS EXPLICITLY STATED OTHERWISE IN THIS AGREEMENT, THE ASSIGNED PROPERTY, PRODUCTS IN EXHIBIT E, AND PROPRIETARY BUSINESS INFORMATION ARE PROVIDED "AS IS" AND THE PARTIES HEREBY DISCLAIM ALL WARRANTIES OF ANY KIND WITH RESPECT TO ANY OF THE ASSIGNED PROPERTY, PRODUCTS IN EXHIBIT E OR PROPRIETARY BUSINESS INFORMATION, INCLUDING, WITHOUT LIMITATION, ANY IMPLIED WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE. 6. LIMITATION OF LIABILITY IN NO EVENT WILL EITHER PARTY BE LIABLE FOR ANY CONSEQUENTIAL, INCIDENTAL, SPECIAL, INDIRECT, EXEMPLARY OR PUNITIVE DAMAGES, OR DAMAGES FOR ANY LOSS OF PROFITS, REVENUE OR BUSINESS, EVEN IF SUCH PARTY IS NOTIFIED OF THE POSSIBILITY OF SUCH DAMAGES. The Parties acknowledge that the limitation of liability in this Section 6 and the allocation of risk that it implements is an essential element of the bargain agreed to by the Parties, without which the Parties would not have entered into this Agreement. 7. GENERAL 7.1 This Agreement, and all disputes, claims or controversies arising under or relating to this Agreement or the breach, termination or validity hereof, or any transaction contemplated hereby shall be governed by and settled in accordance with the procedures terms and conditions set forth in the applicable dispute resolution provisions of the Separation Agreement to be signed between the Parties in May or June of 1999. 5 7.2 If either Party commences any action or proceeding against the other Party to enforce this Agreement or any of such Party's rights hereunder, the prevailing Party will be entitled to its reasonable expenses related to such action or proceeding, including reasonable attorneys' and expert fees. 7.3 No delay, failure or waiver by either Party to exercise any right or remedy under this Agreement, and no partial or single exercise, will operate to limit, preclude, cancel, waive or otherwise affect such right or remedy, nor will any single or partial exercise limit, preclude, impair or waive any further exercise of such right or remedy or the exercise of any other right or remedy. 7.4 If any provision of this Agreement is determined to be invalid or unenforceable, the validity or enforceability of the other provisions or of this Agreement as a whole will not be affected; and, in such event, such provision will be changed and interpreted so as best to accomplish the objectives of such provision within the limits of applicable law or applicable court decision. 7.5 Except as provided in Section 7.1, this Agreement, including any exhibit(s) hereto which are incorporated herein by this reference, serves to document formally the entire understanding between the Parties relating to the subject matter hereof, and supersedes and replaces any prior or contemporaneous agreements, negotiations or understandings (whether oral or written), relating generally to the same subject matter. No amendment or modification of any provision of this Agreement will be effective unless in writing and signed by a duly authorized signatory of the Party against which enforcement of the amendment or modification is sought. 6 IN WITNESS WHEREOF, the Parties have caused this Agreement to be executed by their duly authorized representatives as of the Effective Date. IDT CORPORATION NET2PHONE, INC. - ---------------------------------- ---------------------------------- By: /s/ Steve Brown By: /s/ Ilan Slasky ------------------------------ ------------------------------ Name (Print): Steve Brown Name (Print): Ilan Slansky -------------------- -------------------- Title: Chief Financial Officer Title: Chief Financial Officer --------------------------- --------------------------- EX-10.24 7 TAX SHARING AND INDEMNIFICATION AGREEMENT EXHIBIT 10.24 TAX SHARING AND INDEMNIFICATION AGREEMENT THIS TAX SHARING AND INDEMNIFICATION AGREEMENT ("Agreement") is made and entered into as of May 7, 1999, by and between IDT Corporation, a Delaware corporation ("IDT"), and Net2Phone, Inc., a Delaware corporation ("Net2Phone"). --- --------- RECITALS A. IDT is the common parent corporation of an affiliated group of corporations (the "IDT Consolidated Group") within the meaning of Section 1504(a) of the Internal Revenue Code of 1986, as amended (the "Code"). The IDT Consolidated Group includes Net2Phone. The IDT Consolidated Group have heretofore joined in the filing of consolidated federal income tax returns. B. IDT expects that as a result of sales of shares of Net2Phone, including through a public offering, Net2Phone will cease to be a member of the IDT Consolidated Group, although Net2Phone may continue to be included in Combined Tax returns (as defined herein). C. IDT and Net2Phone desire to provide for the payment of Income Taxes (as defined herein) and entitlement to refunds thereof, allocate responsibility and provide for cooperation in connection with the filing of returns in respect of Income Taxes, and provide for certain other matters relating to Income Taxes. NOW, THEREFORE, in consideration of the agreements contained herein and intending to be legally bound hereby, IDT and Net2Phone agree as follows: ARTICLE 1. DEFINITIONS 1.1 Definitions. For purposes of this Agreement, the terms set forth below shall have the following meanings, in addition to the terms defined elsewhere in this Agreement: (a) "Actually Realized" or "Actually Realizes" shall mean, for purposes of determining the timing of the occurrence of any Income Tax Benefit, the time at which the amount of Income Taxes paid by such person is reduced below the amount of Income Taxes that such person would have been required to pay but for the occurrence of such Income Tax Benefit. In the case of an Income Tax Benefit in the form of a Refund, "Actually Realized" or "Actually Realizes" means the date such Refund is received. (b) "Carryback" shall mean the carryback of a Tax Asset (including, without limitation, a net operating loss, a net capital loss or a tax credit) by Net2Phone from a Post-Deconsolidation Taxable Period to a Pre-Deconsolidation Taxable Period. 1 (c) "Combined Tax" shall mean, with respect to each foreign, state or local taxing jurisdiction, any Income Tax payable to such foreign, state or local taxing jurisdiction in which a member of the Net2Phone Group files tax returns with a member of the IDT Sub-Group, on a consolidated, combined, or unitary basis for purposes of such Income Tax. (d) "Deconsolidation" shall mean any event pursuant to which Net2Phone ceases to be a member of the IDT Consolidated Group. (e) "Deconsolidation Date" means the day on which Net2Phone ceases to be a member of the IDT Consolidated Group, as determined under Treas. Reg. (S)1.1502- 76(b). (f) "Federal Tax" shall mean any tax imposed under Subtitle A of the Code. (g) "Final Determination" shall mean (i) with respect to Federal Taxes, a "determination" as defined in Section 1313(a) of the Code or execution of an Internal Revenue Service Form 870AD and, with respect to taxes other than Federal Taxes, any final determination of liability in respect of a tax that, under applicable law, is not subject to further appeal, review, or modification through proceedings or otherwise, (ii) any final disposition of a tax issue by reason of the expiration of a statute of limitations, or (iii) the payment of tax by IDT with respect to any item disallowed or adjusted by any taxing authority where IDT determines in good faith that no action should be taken to recoup such payment. (h) "IDT Consolidated Group" shall mean, at any time, IDT and each direct and indirect corporate subsidiary eligible to join with IDT in the filing of a consolidated Federal Tax return. (i) "IDT Sub-Group" shall mean, at any time, IDT and each of its direct and indirect corporate subsidiaries other than those subsidiaries that are members of the Net2Phone Group. (j) "IDT Sub-Group Separate Return" shall mean an Income Tax return of IDT or a member of the IDT Sub-Group for a Post-Deconsolidation Tax Period other than a Combined Tax return. (k) "Income Tax" (i) shall mean (A) any foreign or any United States federal, state or local tax, charge, fee, impost, levy or other assessment which is based upon, measured by, or calculated with respect to (1) net income or profits (including, but not limited to, any capital gains, gross receipts, or minimum tax, and any tax on items of tax preference, but not including sales, use, value added, real property gains, real or personal property, transfer or similar taxes), or (2) multiple bases (including, but not limited to, corporate franchise, doing business or occupation taxes), if one or more of the bases upon which tax may be based, by which it may be measured, or with respect to which it may be calculated, is described in clause (i)(A)(1) of this definition, together with (B) any interest, penalties, fines, additions to tax or additional amounts imposed by any taxing jurisdiction with respect thereto, 2 and (ii) shall include any transferee liability in respect of an amount described in clause (i) of this definition. (l) "Income Tax Benefit" shall mean, in respect of a person or group of persons for any taxable period, the excess of (A) the hypothetical Income Tax liability of such person or group of persons for such taxable period, calculated as if the use of a Tax Asset had not occurred but with all other facts unchanged, over (B) the actual Income Tax liability of such person or group of persons for such taxable period, calculated taking into account the use of such Tax Asset (and treating a Refund as a negative Income Tax liability, and taking into account credits (if any), for purposes of such calculation). (m) "Net2Phone Combined Tax Liability" shall mean, with respect to any jurisdiction and any taxable year or part thereof for which Combined Tax is due, an amount of Combined Tax determined in accordance with the principles set forth in the definition of Net2Phone Federal Tax Liability; provided, however, that the total amount of the Net2Phone Combined Tax Liability shall also include, to the extent not included after application of the principles set forth in the definition of Net2Phone Federal Tax Liability, any actual Income Tax liability owed in a jurisdiction in which a member of the Net2Phone Group files or is included in a Combined Tax return, to the extent the Income Tax liability shown on such return exceeds the amount of such liability that would have been owed had no member of the Net2Phone Group been included in such return. (n) "Net2Phone Federal Tax Liability" shall mean, with respect to any taxable year or portion thereof during which Net2Phone is a member of the IDT Consolidated Group, the sum of the Net2Phone Group's Federal Income Tax liability, computed as if the Net2Phone Group were not and never were part of the IDT Consolidated Group, but rather were a separate affiliated group of corporations filing a consolidated federal income tax return pursuant to Section 1501 of the Code; provided, however, that transactions with members of the IDT Sub-Group shall be reflected according to the provisions of the consolidated return regulations promulgated under the Code governing intercompany transactions, and that Deconsolidation will trigger any deferred amounts, excess loss accounts, or similar items. Such computation shall be made (A) without regard to the income, deductions (including net operating loss and capital loss deductions), and credits in any year of any member of the IDT Group that is not a member of the Net2Phone Group, (B) by taking account of all Tax Assets of the Net2Phone Group other than any Tax Asset which produces an Income Tax Benefit to IDT in accordance with Section 2.1(c)(iii), (C) as though the highest rate of tax specified in subsection (b) of Section 11 of the Code (for any other similar rates applicable to specific types of income) were the only rate set forth in that subsection, and with other similar adjustments as described in Section 1561 of the Code, (D) reflecting the positions, elections, and accounting methods used by IDT in preparing the consolidated Federal Tax return for the IDT Group, and (E) by not permitting the Net2Phone Group any compensation deductions arising in respect of the issuance by IDT of IDT stock to any employee of the Net2Phone Group. 3 (o) "Net2Phone Group" shall mean, at any time, Net2Phone and any direct or indirect corporate subsidiaries of Net2Phone that would be eligible to join with Net2Phone, with respect to Federal Taxes, in the filing of a consolidated federal income tax return and, with respect to Combined Taxes, in the filing of a consolidated, combined, or unitary Income Tax return if Net2Phone were not consolidated, combined, or filing on a unitary basis with any member of the IDT Sub-Group. (p) "Net2Phone Group Separate Return" shall mean an Income Tax return of Net2Phone or a member of the Net2Phone Group for a Post-Deconsolidation Tax Period other than a Combined Tax return. (q) "Post-Deconsolidation Tax Period" means (i) any tax period, or portion thereof, beginning and ending after the date of Deconsolidation, and (ii) with respect to a tax period that begins before and ends after the date of Deconsolidation, such portion of the tax period that commences on the day immediately after the date of Deconsolidation. (r) "Pre-Deconsolidation Tax Period" means (i) any tax period, or portion thereof, beginning and ending before or on the date of Deconsolidation, and (ii) with respect to a period that begins before and ends after the date of Deconsolidation, such portion of the tax period ending on and including the date of Deconsolidation. (s) "Refund" shall mean any refund of Income Taxes, including any reduction in Income Tax liabilities by means of a credit, offset or otherwise. (t) "Tax Asset" means any net operating loss, net capital loss, investment tax credit, foreign tax credit, charitable deduction, or any other deduction, credit, or tax attribute which could reduce Income Tax (including, without limitation, deductions and credits related to alternative minimum taxes). 1.2 Internal References. Unless the context indicates otherwise, references to Articles, Sections, and paragraphs shall refer to the corresponding articles, sections, and paragraphs in this Agreement and references to the parties shall mean the parties to this Agreement. ARTICLE 2. TAX SHARING 2.1 Tax Sharing. (a) General. For each taxable year of the IDT Consolidated Group during which income, loss, or credit against tax of the Net2Phone Group is includible in the consolidated Federal Tax return of the IDT Group, Net2Phone shall pay to 4 IDT an amount equal to the Net2Phone Federal Tax Liability, and for each taxable period during which income, loss, or credit against tax of any member of the Net2Phone Group is includible in a return relating to a Combined Tax, Net2Phone shall pay to IDT an amount equal to the Net2Phone Combined Tax Liability for such taxable period, each as shown on the Pro Forma Returns (as defined in paragraph (c) below). Subject to receipt of the payments described in the first two sentences of this Section 2.1(a), and subject to the provisions of Section 2.1(d), IDT shall be liable for and shall indemnify the Net2Phone Group against all Income Taxes due with respect of all consolidated Federal Tax returns of the IDT Group, and all returns relating to a Combined Tax. (b) Estimated Payments. For each taxable period as to which Section 2.1(a) applies, IDT may determine the amount of the estimated tax installment of the Net2Phone Federal Tax Liability (corresponding to IDT's estimated Federal Tax installment), as determined under the principles of Section 2.1(a). If IDT makes such a determination, Net2Phone shall pay to IDT, within ten (10) business days (i) of the statutorily mandated payment date or (ii), if later, of the date of delivery of a written request for such payment under this Section 2.1(b), the amount so determined. In addition for each taxable period as to which Section 2.1(a) applies, IDT may determine under provisions of applicable law the amount of the estimated tax installment of the Net2Phone Combined Tax Liability (corresponding to the relevant estimated Combined Tax installment), as determined under the principles of Section 2.1(a). If IDT makes such a determination, Net2Phone shall pay to IDT, within ten (10) business days (i) of the statutorily mandated payment date or (ii), if later, of the date of delivery of a written request for such payment under this Section 2.1(b), the amount so determined. (c) Payment of Taxes at Year-End. (i) Within thirty (30) days after the date the IDT Consolidated Group's Federal Tax return is filed, IDT shall make available to Net2Phone a pro forma Federal Tax return (a "Pro Forma Federal Return") of the Net2Phone Group reflecting the Net2Phone Federal Tax Liability. Within thirty (30) days after the date the last Combined Tax return is filed for the fiscal year to which such returns relate, IDT shall make available to Net2Phone the relevant pro forma Combined Tax returns (each a "Pro Forma Combined Tax Return" and together with the Pro Forma Federal Returns, the "Pro Forma Returns") of the Net2Phone Group reflecting the relevant Net2Phone Combined Tax Liability. The Pro Forma Returns shall be prepared in good faith in a manner generally consistent with past practice. (ii) Within ten (10) days of the receipt by Net2Phone of a Pro Forma Federal Return, Net2Phone shall pay to IDT, or IDT shall pay to Net2Phone, as appropriate, an amount equal to the difference, if any, between the Net2Phone Federal Tax Liability reflected on the Pro Forma Federal Return for such year and the aggregate amount of the estimated installments of the Net2Phone Federal Tax Liability for such year made pursuant to Section 2.1(b). Within ten (10) days of the receipt of the Pro Form Combined Tax Returns, Net2Phone shall pay to IDT, or IDT shall pay to Net2Phone, as appropriate, an amount equal to the difference, if any, between the 5 Net2Phone Combined Tax Liability reflected on the relevant Pro Forma Combined Tax Returns and the aggregate amount of the estimated installments paid with respect to the corresponding Net2Phone Combined Tax Liability pursuant to Section 2.1(b). (iii) If, under applicable law and consistent with this Agreement, the IDT Sub-Group avails itself of a Tax Asset of the Net2Phone Group, IDT shall pay to Net2Phone an amount equal to the Income Tax Benefit attributable to such Tax Asset, if and when Actually Realized by IDT. The parties agree that all net operating losses and net capital losses of the IDT Group shall be taken into account by IDT in the order in which such net operating losses and net capital losses have arisen; all other Tax Assets of the Net2Phone Group shall be taken into account by IDT in the above- described manner, subject, however, to the ordering rules then in effect under the Code. (iv) In the event that IDT makes a cash deposit with a taxing authority in order to stop the running of interest or makes a payment of tax and correspondingly takes action to recoup such payment (such as suing for a refund), Net2Phone shall pay to IDT, within ten (10) days (i) of the date such cash deposit is made by IDT or (ii) if later, of the date of delivery of a written request for such payment under this Section 2.1(c)(iv), an amount equal to Net2Phone's share of the amount so deposited or paid (calculated in a manner consistent with the determinations provided in this Article 2). Upon receipt by IDT of a refund of any amounts paid by it in respect of which Net2Phone shall have advanced an amount hereunder, IDT shall pay to Net2Phone the amount of such refund, together with any interest received by it on such refund, within ten (10) days of the receipt of such refund. If and to the extent that any claim for refund or contest based thereupon shall be unsuccessful, the payment by Net2Phone under this Section 2.1(c)(iv) may be credited by IDT toward any of Net2Phone's obligations under this Section 2.1. (d) Treatment of Adjustments. If any adjustment is made in a Federal Tax return of the IDT Group or in a return relating to a Combined Tax of the IDT Group, after the filing thereof, in which income or loss of the Net2Phone Group (or any member thereof) is included, then at the time of a Final Determination of the adjustment Net2Phone shall pay to IDT, or IDT shall pay to Net2Phone, as the case may be, the difference between all payments actually made under Section 2.1 with respect to the taxable year or period covered by such tax return and all payments that would have been made under Section 2.1 taking such adjustment into account together with any penalties actually paid and interest for each day until the date of Final Determination calculated at the rate determined, in the case of a payment by Net2Phone, under Section 6621(a)(2) of the Code and, in the case of a payment by IDT, under Section 6621(a)(1) of the Code. (e) Preparation of Consolidated and Combined Returns. For all taxable periods ending on or before the Deconsolidation Date, so long as the IDT Group 6 elects to file (i) consolidated Federal Tax returns as permitted by Section 1501 of the Code or (ii) any Combined Tax return as permitted by applicable state law, Net2Phone shall consent to the filing of such returns by IDT. IDT shall prepare and file such returns and any other returns, documents, or statements required to be filed with the Internal Revenue Service with respect to the determination of the Federal Tax liability of the IDT Group and with the appropriate taxing authorities with respect to the determination of a Combined Tax liability. With respect to such return preparation, IDT shall act in good faith with regard to all members included in an applicable return. IDT shall have the right with respect to any consolidated Federal Tax return or return relating to a Combined Tax that it has filed or will file to determine in good faith (i) the manner in which such returns, documents or statements shall be prepared and filed, including, without limitation, the manner in which any item of income, gain, loss, deduction or credit shall be reported, (ii) whether any extensions should be requested, and (iii) the elections that will be made by any member of the IDT Group. (f) Contest of Consolidated and Combined Returns. IDT shall have the right, in good faith, to (i) contest, compromise, or settle any adjustment or deficiency proposed, or as a result of any audit of any Federal Tax return or return relating to a Combined Tax, (ii) file, prosecute, compromise or settle any claim for refund, and (iii) determine whether any refunds shall be received by way of refund or credited against tax liabilities. In addition, IDT shall prepare and file ruling requests, and take all other actions on behalf of any member of the IDT Group that it deems appropriate in providing tax services to the members of the IDT Group. IDT shall, to the extent such information is available, advise Net2Phone of any significant Net2Phone tax issue being audited or contested by the federal, state, local or other relevant taxing authorities, shall keep Net2Phone informed with respect to any audit, contest, compromise or settlement thereof, and shall provide to Net2Phone copies (subject to deletion of nonrelevant information) of all material correspondence relating to such contest. (g) Net2Phone Consent. Notwithstanding anything to the contrary in Section 2.1(e) or Section 2.1(f), except as IDT shall determine, in good faith, is required by law, without the express written consent of Net2Phone, which consent shall not be unreasonably withheld or delayed, IDT shall not file any amended Federal Tax return or Combined Tax return, settle any tax claim or assessment, file any ruling request, make any Tax election, or surrender any right to claim a Refund, if a principal effect of such action is to increase a Net2Phone Federal Tax Liability or a Net2Phone Combined Tax Liability. (h) Separate Returns. Net2Phone shall prepare, or cause to be prepared, and file, or cause to be filed, all Net2Phone Group Separate Returns, and shall pay, or cause to be paid, all Income Tax due with respect to such returns. IDT shall prepare, or cause to be prepared, and file, or cause to be filed, all IDT Sub-Group Separate Returns, and shall pay, or cause to be paid, all Income Tax due with respect to such returns. 7 2.2 Reimbursement for Certain Services. IDT shall provide services in connection with this Agreement, including, but not limited to, (i) those services relating to the preparation of returns (including Pro Forma Returns) described in paragraph 2.1(b) above, and (ii) services relating to the other activities described in paragraph 2.1(e) above. As compensation for these services, Net2Phone shall pay IDT a fee calculated on a basis such that IDT is reimbursed for all reasonable direct and indirect costs and expenses incurred with respect to Net2Phone's share of the overall costs and expenses incurred by IDT with respect to tax-related services. IDT shall calculate and invoice Net2Phone for the fee payable, and Net2Phone will pay the invoiced amount in a manner consistent with the invoice and payment procedures provided for in that certain Services Agreement, between IDT, certain members of the IDT Sub-Group, and Net2Phone, dated of even date herewith. ARTICLE 3. POST-DECONSOLIDATION 3.1 Additional Rights and Liabilities Post-Deconsolidation. (a) Apportionment of Tax Attributes. If the IDT Consolidated Group has a Tax Asset, the portion, if any, of such Tax Asset that shall be apportioned to the Net2Phone Group and treated as a carryover to the first Post-Deconsolidation taxable period of the Net2Phone Group shall be determined in accordance with Treasury Regulations (S)(S)1.1502-79 and 1.1502-79A; provided, however, that the portion, if any, of any consolidated unused foreign tax credit which shall be apportioned to the Net2Phone Group shall be determined separately with respect to each of the items of income listed in Code section 904(d). No consolidated Federal Income Tax Asset of the IDT Consolidated Group, other than those described in the first sentence hereof, and no Combined Tax Asset of the IDT Group, shall be apportioned to the Net2Phone Group, except as IDT determines is otherwise required under the provisions of applicable law. IDT shall determine the portion, if any, of any Tax Asset which must (absent a Final Determination to the contrary) be apportioned to the Net2Phone Group in accordance with this Section 3.1(a) and applicable law, and shall provide written notice of the calculation thereof to Net2Phone as soon as practicable after the information necessary to make such calculation becomes available to IDT. (b) Apportionment of Consolidated Section 382 Limitation. In the event that, after the date of this Agreement and prior to Deconsolidation, the IDT Group suffers an ownership change resulting in a consolidated Section 382 limitation (within the meaning of Treasury Regulations (S)1.1502-95T), then, upon Deconsolidation, IDT shall equitably apportion the consolidated Section 382 limitation between the IDT Sub-Group and the Net2Phone Group as permitted by Treasury Regulations (S)1.1502-95T(c) and shall prepare and file the election to apportion the consolidated Section 382 limitation in accordance with the provisions of Treasury Regulations 8 (S)1.1502-95T(e). Net2Phone agrees to cooperate in the preparation, execution and filing of such election. (c) Net2Phone Group Separate Returns. Net2Phone shall prepare, or cause to be prepared all Net2Phone Group Separate Returns. Net2Phone covenants that on or after a Deconsolidation it will not, nor will it cause or permit any member of the Net2Phone Group to make or change any tax election, change any accounting method, amend any tax return or take any tax position on any tax return, take any other action, omit to take any action, or enter into any transaction that results in any increase in the tax liability or reduction of any Tax Asset of the IDT Group in respect of any Pre-Deconsolidation Tax Period, without first obtaining the written consent of an authorized representative of IDT. (d) Carrybacks. Except to the extent otherwise consented to by IDT or prohibited by applicable law, Net2Phone (on its own behalf and on behalf of the Net2Phone Group) shall elect to relinquish, waive or otherwise forego all Carrybacks. In the event that Net2Phone is prohibited by applicable law to relinquish, waive or otherwise forego a Carryback (or IDT consents thereto), (i) IDT shall cooperate with Net2Phone, at Net2Phone's expense, in seeking from the appropriate taxing jurisdiction such Refund as reasonably would result from such Carryback, and (ii) Net2Phone shall be entitled to any Income Tax Benefit Actually Realized by a member of the IDT Group (including any interest thereon received from such taxing jurisdiction), to the extent that such Income Tax Benefit is directly attributable to such Carryback, within 10 days after such Income Tax Benefit is Actually Realized; provided, however, that Net2Phone shall indemnify and hold the members of the IDT Group harmless from and against any and all collateral tax consequences resulting from or caused by any such Carryback, including (but not limited to) the loss or postponement of benefit from the use of tax attributes generated by a member of the IDT Group (x) that expire unutilized, but would have been utilized but for such Carryback, or (y) the use of which is postponed to a later taxable period than the taxable period in which such tax attributes otherwise would have been utilized but for such Carryback. Nothing in this Agreement shall require IDT to file a claim for refund of Federal Taxes or Combined Taxes which IDT, in its sole discretion, determines lacks substantial authority, as defined in the Code and the Treasury Regulations thereunder. If there is a Final Determination that results in any change to or adjustment of an Income Tax Benefit Actually Realized by a member of the IDT Group that is directly attributable to a Carryback, then IDT (or its designee) shall make a payment to Net2Phone, or Net2Phone shall make a payment to IDT (or its designee), as may be necessary to adjust the payments between Net2Phone and IDT (or its designee) to reflect the payments that would have been made under this Section 3.1(d) had the adjusted amount of such Income Tax Benefit been taken into account in computing the payments due under this Section 3.1(d). (e) Refunds. Except to the extent provided in Section 3.1(d) hereof, IDT shall be entitled to all Refunds (and any interest thereon received from the applicable taxing jurisdiction) in respect of Income Taxes for all Pre- 9 Deconsolidation Tax Periods. Except to the extent provided in Section 3.1(d), Net2Phone shall be entitled to all Refunds (and any interest thereon received from the applicable taxing jurisdiction) in respect of Income Taxes paid by Net2Phone with respect to Net2Phone Group Separate Returns and attributable to Post-Deconsolidation Tax Periods included in Combined Tax returns. A party receiving a Refund to which another party is entitled pursuant to this Section 3.1(e) shall pay the amount to which such other party is entitled within ten days after such Refund is Actually Realized. IDT shall be permitted to file, and Net2Phone shall fully cooperate with IDT in connection with, any claim for Refund in respect of an Income Tax for which IDT is responsible pursuant to Section 2.1 (a) hereof. ARTICLE 4. MISCELLANEOUS 4.1 Limitation of Liability. Neither IDT nor Net2Phone shall be liable to the other for any special, indirect, incidental, or consequential damages of the other arising in connection with this Agreement. 4.2 Subsidiaries. (a) Performance. IDT agrees and acknowledges that IDT shall be responsible for the performance of the obligations of each member of the IDT Sub-Group hereunder applicable to such subsidiary. Net2Phone agrees and acknowledges that Net2Phone shall be responsible for the performance by each member of the Net2Phone Group of the obligations hereunder applicable to such member. (b) Application to Present and Future Subsidiaries. This Agreement is being entered into by IDT and Net2Phone on behalf of themselves and each member of the IDT Sub-Group and the Net2Phone Group, respectively. This Agreement shall constitute a direct obligation of each such member and shall be deemed to have been readopted and affirmed on behalf of any corporation which becomes a member of the IDT Sub-Group or the Net2Phone Group in the future. IDT shall cause each member of the IDT Group, and Net2Phone shall cause each member of the Net2Phone Group, to comply fully with the terms of this Agreement. Each party shall, upon the written request of the other, cause any of their respective group members to execute and deliver a counterpart of this Agreement. 4.3 Cooperation. (a) Net2Phone, on behalf of itself and each member of the Net2Phone Group, agrees to provide IDT (or its designee) with such cooperation or information as IDT (or its designee) reasonably shall request in connection with the determination of any other calculations described in this Agreement, the preparation or filing of any Income Tax return or claim for Refund, or the conduct of any proceeding relating to Income Tax. Such cooperation and information shall include, 10 without limitation, upon reasonable notice (i) promptly forwarding copies of appropriate notices and forms or other communications (including, without limitation, information document requests, revenue agent's reports and similar reports, notices of proposed adjustments and notices of deficiency) received from or sent to any taxing jurisdiction or any other administrative, judicial or governmental authority, (ii) providing copies of all relevant Income Tax returns, together with accompanying schedules and related workpapers, documents relating to rulings or other determinations by taxing authorities, and such other records concerning the ownership and tax basis of property, or other relevant information that Net2Phone or any member of the Net2Phone Group may possess, (iii) the provision of such additional information and explanations of documents and information provided under this Agreement (including statements, certificates and schedules delivered by either party) as shall be reasonably requested by IDT (or its designee), (iv) the execution of any document that may be necessary or reasonably helpful in connection with the filing of an Income Tax return, a claim for a Refund, or in connection with any proceeding, including such waivers, consents or powers of attorney as may be necessary for IDT to exercise its rights under this Agreement, and (v) the use of Net2Phone's reasonable efforts to obtain any documentation from a governmental authority or a third party that may be necessary or reasonably helpful in connection with any of the foregoing. Upon reasonable notice, Net2Phone shall make its, or shall cause each member of the Net2Phone Group to make its, employees and facilities available on a mutually convenient basis to provide explanation of any documents or information provided hereunder. Any information obtained under this Section 4.3(a) shall be kept confidential, except as otherwise reasonably may be necessary in connection with the filing of Income Tax returns or claims for Refund or in conducting any proceeding. It is expressly the intention of the parties to this Agreement to take all actions that shall be necessary to establish IDT as the sole agent for Income Tax purposes with respect to all IDT consolidated Federal Returns and Combined Tax returns. (b) IDT, on behalf of itself and each member of the IDT Sub-Group, agrees to provide Net2Phone (or its designee) with such cooperation or information as Net2Phone (or its designee) reasonably shall request in connection with the determination of any other calculations described in this Agreement, the preparation or filing of any Income Tax return or claim for Refund, or the conduct of any proceeding relating to Income Tax. Such cooperation and information shall include, without limitation, upon reasonable notice (i) promptly forwarding copies of appropriate notices and forms or other communications (including, without limitation, information document requests, revenue agent's reports and similar reports, notices of proposed adjustments and notices of deficiency) received from or sent to any taxing jurisdiction or any other administrative, judicial or governmental authority, (ii) providing copies of all relevant Income Tax returns, together with accompanying schedules and related workpapers, documents relating to rulings or other determinations by taxing authorities, and such other records concerning the ownership and tax basis of property, or other relevant information that IDT or any member of the IDT Sub-Group may possess, (iii) the provision of such additional information and explanations of documents and information provided under this 11 Agreement (including statements, certificates and schedules delivered by either party) as shall be reasonably requested by Net2Phone (or its designee), (iv) the execution of any document that may be necessary or reasonably helpful in connection with the filing of an Income Tax return, a claim for a Refund, or in connection with any proceeding, including such waivers, consents or powers of attorney as may be necessary for Net2Phone to exercise its rights under this Agreement, and (v) the use of IDT's reasonable efforts to obtain any documentation from a governmental authority or a third party that may be necessary or reasonably helpful in connection with any of the foregoing. Upon reasonable notice, IDT shall make its, or shall cause each member of the IDT Sub-Group to make its, employees and facilities available on a mutually convenient basis to provide explanation of any documents or information provided hereunder. Any information obtained under this Section 4.3(b) shall be kept confidential, except as otherwise reasonably may be necessary in connection with the filing of Income Tax returns or claims for Refund or in conducting any proceeding. Notwithstanding any other provision of this Agreement, neither Net2Phone, nor any of member of the Net2Phone Group shall have any right to receive or obtain any information relating to Income Taxes of IDT or the IDT Group other than (i) information relating solely to Net2Phone or a member of the Net2Phone Group, and (ii) information required to be provided pursuant to Section 2.1(f) hereof. 4.4 Retention of Records. Net2Phone agrees to retain all Income Tax returns, related schedules and workpapers, and all material records and other documents as required under Code Section 6001 and the Treasury Regulations promulgated thereunder (and any similar provision of state, local, or foreign Income Tax law) existing on the date hereof or created in respect of (i) any taxable period that ends on or before or includes the Deconsolidation Date or (ii) any taxable period that may be subject to a claim hereunder, until the later of (x) the expiration of the statute of limitations (including extensions) for the taxable periods to which such Income Tax returns and other documents relate and (y) the Final Determination of any payments that may be required in respect of such taxable periods under this Agreement. IDT shall notify Net2Phone whenever the applicable statute of limitations for any taxable period, including extensions, expires or, if sooner or later, as the case may be, whenever a Final Determination has occurred with respect to such taxable period. From and after the end of the period described in the first sentence of this Section 4.4, if Net2Phone wishes to dispose of any such records and documents, then Net2Phone shall provide written notice thereof to IDT and shall provide IDT the opportunity to take possession of any such records and documents within 90 days after such notice is delivered, at IDT's sole cost and expense; provided, however, that if IDT does not, within such 90-day period, confirm its intention to take possession of such records and documents, Net2Phone may destroy or otherwise dispose of such records and documents. 12 4.5 Agent. Each member of the Net2Phone Group hereby irrevocably appoints IDT as its agent and limited attorney-in-fact to take any action as IDT may deem necessary or appropriate to effect Section 2.1 including, without limitation, those actions specified in Treasury Regulation (S)1.1502-77(a). 4.6 Amendments. This Agreement may not be amended or terminated orally, but only by a writing duly executed by or on behalf of the parties hereto. Any such amendment shall be validly and sufficiently authorized for purposes of this Agreement if it is signed on behalf of IDT and Net2Phone by any of their respective presidents or vice presidents. 4.7 Resolution of Disputes. Any disputes between the parties concerning the calculation of amounts, allocation, or attribution of costs, or any Tax Asset or Income Tax Benefit, or similar accounting matters shall be resolved in accordance with IDT's interpretation of this Agreement, unless Net2Phone shall provide IDT with an opinion of a nationally recognized public accounting firm to the effect that such interpretation is unreasonable. If such opinion takes the position that IDT's interpretation of this Agreement is unreasonable, and the parties, conferring in good faith, cannot thereafter successfully resolve such dispute in a timely manner, then either party may submit the matter to binding arbitration in accordance with the Rules of Commercial Arbitration of the American Arbitration Association. Judgment upon the award rendered by the arbitrator(s) may be entered in any court having jurisdiction thereof. Such arbitration shall occur in New York City pursuant to Article VIII of the Separation Agreement entered into between the parties as of the date hereof , unless the otherwise agreed by the parties. The arbitrator(s) may, in such proceeding, award attorney's fees and costs to the prevailing party. 4.8 Severability. If any provision of this Agreement or the application of any such provision to any party or circumstances shall be determined by any court of competent jurisdiction to be invalid, illegal, or unenforceable to any extent, the remainder of this Agreement or such provision or the application of such provision to such party or circumstances, other than those to which it is so determined to be invalid, illegal, or unenforceable, shall remain in full force and effect to the fullest extent permitted by law and shall not be affected thereby, unless such a construction would be unreasonable. 13 4.9 Notices. All notices and other communications required or permitted hereunder shall be in writing, shall be deemed duly given upon actual receipt, and shall be delivered (a) in person, (b) by registered or certified mail, postage prepaid, return receipt requested, or (c) by facsimile or other generally accepted means of electronic transmission (provided that a copy of any notice delivered pursuant to this clause (c) shall also be sent pursuant to clause (a) or (b)), addressed as follows: (1) If to IDT to: IDT Corporation 190 Main Street Hackensack, NJ 07601 Attn: Chief Financial Officer (2) If to Net2Phone, to: Net2Phone, Inc. 171 Main Street Hackensack, NJ 07601 Attn: Chief Financial Officer 4.10 Expenses. Unless otherwise expressly provided in this Agreement, each party shall bear any and all expenses that arise from its respective obligations under this Agreement. 4.11 Further Assurances. IDT and Net2Phone shall execute, acknowledge, and deliver, or cause to be executed, acknowledged, and delivered, such instruments and take such other actions as may be necessary or advisable to carry out their obligations under this Agreement and under any exhibit, document, or other instrument delivered pursuant hereto. 4.12 Entire Agreement. This Agreement constitutes the entire understanding of the parties hereto with respect to the subject matter hereof. 4.13 Successors. This Agreement shall be binding upon and inure to the benefit of any successor, by merger, acquisition of assets, or otherwise, to any of the parties hereto (including but not limited to any successor of IDT and Net2Phone succeeding to the 14 tax attributes of such party under Section 381 of the Code), to the same extent as if such successor had been an original party hereto. 4.14 Authorization, etc. Each of the parties hereto hereby represents and warrants that it has the power and authority to execute, deliver, and perform this Agreement, that this Agreement has been duly authorized by all necessary corporate action on the part of such party, that this Agreement constitutes a legal, valid and binding obligation of each such party, and that the execution, delivery and performance of this Agreement by such party does not contravene or conflict with any provision of law or of its charter or bylaws or any agreement instrument or order binding on such party. 4.15 Titles and Headings. Titles and headings to sections herein are for convenience and reference only and are not intended to be a part, or to affect the meaning or interpretation, of this Agreement. 4.16 Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of New York. 4.17 Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same Agreement. 15 IN WITNESS WHEREOF, each of the parties hereto has caused this agreement to be executed by a duly authorized officer as of the date first above written. IDT CORPORATION NET2PHONE, INC. By /s/ Steve Brown By /s/ Howard Balter -------------------------------- ---------------------------------- Title: Chief Financial Officer Title: Chief Executive Officer 16 EX-10.25 8 SEPARATION AGREEMENT EXHIBIT 10.25 SEPARATION AGREEMENT -------------------- THIS SEPARATION AGREEMENT, dated as of May 7, 1999, is by and between IDT Corporation, a Delaware corporation ("IDT"), and Net2Phone, Inc., a Delaware corporation ("Net2Phone"). Capitalized terms used herein and not otherwise defined shall have the respective meanings assigned to them in Article I hereof. WHEREAS, Net2Phone is currently a subsidiary of IDT; WHEREAS, the Board of Directors of IDT has determined that it is appropriate and desirable to cause Net2Phone to offer and sell for its own account equity interests in Net2Phone to additional investors; WHEREAS, IDT has historically provided various services to Net2Phone on an informal basis and, in connection with the separation of IDT and Net2Phone, the parties desire to formalize certain relationships which will continue as described herein; and WHEREAS, it is appropriate and desirable to set forth the principal corporate transactions required to effect the separation, and certain other agreements that will govern certain matters relating to the relationship of IDT and Net2Phone following the sale of equity to additional investors. NOW, THEREFORE, for good and valuable consideration, the sufficiency of which is hereby acknowledged, the parties, intending to be legally bound, agree as follows: ARTICLE I DEFINITIONS For the purpose of this Agreement the following terms shall have the following meanings: 1.1. "Action" means any demand, action, suit, countersuit, arbitration, inquiry, proceeding or investigation by or before any federal, state, local, foreign or international Governmental Authority or any arbitration or mediation tribunal. 1.2. "Affiliate" of any Person means a Person that controls, is controlled by, or is under common control with such Person. As used herein, "control" means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of such entity, whether through ownership of voting securities or other interests, by contract or otherwise. 1.3. "Agreement" means this Separation Agreement, including all of the Schedules hereto. 1.4. "Ancillary Agreements" means (a) the IDT Services Agreement, dated as of the date hereof, by and between IDT and Net2Phone, (b) the Net2Phone Services Agreement, dated the date hereof, by and between IDT and Net2Phone, (c) the Internet/Telecommunications Agreement, dated the date hereof, by and between IDT and Net2Phone, (d) the Joint Marketing Agreement, dated the date hereof, by and between IDT and Net2Phone, (e) the Assignment Agreement, dated as of the date hereof, by and between IDT and Net2Phone, (f) the Tax Sharing and Indemnification Agreement, dated as of the date hereof, by and between IDT and Net2Phone, and (g) the Assignment and Assumption Agreement, dated as of the date hereof, by and between IDT and Net2Phone. 1.5. "Applicable Deadline" has the meaning set forth in Section 8.3(b). 1.6. "Arbitration Act" means the United States Arbitration Act, 9 U.S.C. 1- 14, as the same may be amended from time to time. 1.7. "Arbitration Demand Date" has the meaning set forth in Section 8.3(a). 1.8. "Arbitration Demand Notice" has the meaning set forth in Section 8.3(a). 1.9. "Code" means the Internal Revenue Code of 1986, as amended. 1.10. "Commission" means the United States Securities and Exchange Commission. 1.11. "Consents" means any consent, waiver or approval from, or notification requirements to, any third party. 1.12. "CPR" means the Center for Public Resources. 1.13. "Environmental Law" means any federal, state, local, foreign or international statute, ordinance, rule, regulation, code, license, permit, authorization, approval, consent, common law (including tort and environmental nuisance law), legal doctrine, order, judgment, decree, injunction, requirement or agreement with any Governmental Authority, now or hereafter in effect relating to health, safety, pollution or the environment (including ambient air, surface water, groundwater, land surface or subsurface strata) or to emissions, discharges, releases or threatened releases of any substance currently or at any time hereafter listed, defined, designated or classified as hazardous, toxic waste, radioactive or dangerous, or otherwise regulated, under any of the foregoing, or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of any such substances, including the Comprehensive Environmental Response, Compensation and Liability Act, the Superfund Amendments and Reauthorization Act and the Resource Conservation and Recovery Act and comparable provisions in state, local, foreign or international law. 1.14. "Environmental Liabilities" means all Liabilities relating to, arising out of or resulting from any Environmental Law or contract or agreement relating to environmental, health or safety matters (including all removal, remediation or cleanup costs, investigatory costs, governmental response costs, natural resources damages, 2 property damages, personal injury damages, costs of compliance with any settlement, judgment or other determination of Liability and indemnity, contribution or similar obligations) and all costs and expenses (including allocated costs of in-house counsel and other personnel), interest, fines, penalties or other monetary sanctions in connection therewith. 1.15. "Escalation Notice" has the meaning set forth in Section 8.2. 1.16. "Exchange Act" means the Securities Exchange Act of 1934, as amended, together with the rules and regulations promulgated thereunder. 1.17. "Governmental Approval" means any notice, report or other filing to be made, or any consent, registration, approval, permit or authorization to be obtained from, any Governmental Authority. 1.18. "Governmental Authority" means any federal, state, local, foreign or international court, government, department, commission, board, bureau, agency, official or other regulatory, administrative or governmental authority. 1.19. "IDT Group" means IDT and each Person (other than any member of the Net2Phone Group) that is an Affiliate of IDT on the date hereof. 1.20. "IDT Indemnitees" has the meaning set forth in Section 5.2 1.21. "Indemnifying Party" has the meaning set forth in Section 5.4(a). 1.22. "Indemnitee" has the meaning set forth in Section 5.4(a). 1.23. "Indemnity Payment" has the meaning set forth in Section 5.4(a). 1.24. "Information" means information, whether or not patentable or copyrightable, in written, oral, electronic or other tangible or intangible forms, stored in any medium, including studies, reports, records, books, contracts, instruments, surveys, discoveries, ideas, concepts, know-how, techniques, designs, specifications, drawings, blueprints, diagrams, models, prototypes, samples, flow charts, data, computer data, disks, diskettes, tapes, computer programs or other software, marketing plans, customer names, communications by or to attorneys (including attorney-client privileged communications), memos and other materials prepared by attorneys or under their direction (including attorney work product), and other technical, financial, employee or business information or data. 1.25. "Insurance Policies" means the insurance policies written by insurance carriers unaffiliated with IDT pursuant to which members of the Net2Phone Group (or their respective officers or directors) will be insured parties after the date hereof. 1.26. "Insurance Proceeds" means those monies: (a) received by an insured from an insurance carrier; or 3 (b) paid by an insurance carrier on behalf of the insured; in any such case net of any applicable premium adjustments (including reserves and retrospectively rated premium adjustments) and net of any costs or expenses incurred in the collection thereof. 1.27. "Liabilities" means any and all losses, claims, charges, debts, demands, actions, causes of action, suits, damages, obligations, payments, costs and expenses, sums of money, accounts, reckonings, bonds, specialties, indemnities and similar obligations, exonerations, covenants, contracts, controversies, agreements, promises, doings, omissions, variances, guarantees, make whole agreements and similar obligations, and other liabilities, including all contractual obligations, whether absolute or contingent, matured or unmatured, liquidated or unliquidated, accrued or unaccrued, known or unknown, whenever arising, and including those arising under any law, rule, regulation, Action, threatened or contemplated Action (including the costs and expenses of demands, assessments, judgments, settlements and compromises relating thereto and attorneys' fees and any and all costs and expenses (including allocated costs of in-house counsel and other personnel), whatsoever reasonably incurred in investigating, preparing or defending against any such Actions or threatened or contemplated Actions), order or consent decree of any Governmental Authority or any award of any arbitrator or mediator of any kind, and those arising under any contract, commitment or undertaking, including those arising under this Agreement or any Ancillary Agreement, in each case, whether or not recorded or reflected or required to be recorded or reflected on the books and records or financial statements of any Person. 1.28. "Net2Phone Business" means the business of Net2Phone as presently conducted and as more fully described on Exhibit A hereto. --------- 1.29. "Net2Phone Common Stock" means the common stock, $.01 par value per share, of Net2Phone. 1.30. "Net2Phone Group" means Net2Phone, each Subsidiary of Net2Phone and each other Person that is either controlled directly or indirectly by Net2Phone on the date hereof. 1.31. "Net2Phone Indemnitees" has the meaning set forth in Section 5.3(a). 1.32. "Person" means an individual, a general or limited partnership, a corporation, a trust, a joint venture, an unincorporated organization, a limited liability entity, any other entity and any Governmental Authority. 1.33. "Prime Rate" means the rate which Chase Manhattan Bank (or any successor thereto or other major money center commercial bank agreed to by the parties hereto) announces from time to time as its prime lending rate, as in effect from time to time. 1.34. "Securities Act" means the Securities Act of 1933, as amended, together with the rules and regulations promulgated thereunder. 4 1.35. "Security Interest" means any mortgage, security interest, pledge, lien, charge, claim, option, right to acquire, voting or other restriction, right-of-way, covenant, condition, easement, encroachment, restriction on transfer, or other encumbrance of any nature whatsoever. 1.36. "Subsidiary of any Person" means any corporation or other organization whether incorporated or unincorporated of which at least a majority of the securities or interests having by the terms thereof ordinary voting power to elect at least a majority of the board of directors or others performing similar functions with respect to such corporation or other organization is directly or indirectly owned or controlled by such Person or by any one or more of its Subsidiaries, or by such Person and one or more of its Subsidiaries; provided, however, that no Person shall be deemed to be a Subsidiary of such - -------- ------- other Person unless such other Person controls, or has the right, power or ability to control, that Person. 1.37. "Tax Agreement" means the Tax Sharing and Indemnification Agreement, dated as of the date hereof, by and between IDT and Net2Phone. 1.38. "Taxes" has the meaning set forth in the Tax Agreement. 1.39. "Third Party Claim" has the meaning set forth in Section 5.5(a). ARTICLE II ANCILLARY AGREEMENTS AND TAX AGREEMENT 2.1. ANCILLARY AGREEMENTS. Prior to the date hereof, IDT has provided Net2Phone with administration (accounting, human resources, legal), customer service, Internet/telecom, and marketing services and Net2Phone has provided IDT with marketing and certain technical support services. Net2Phone and IDT will enter into the Ancillary Agreements pursuant to which IDT will provide certain of such services to Net2Phone for those periods of time set forth in the respective Ancillary Agreements and Net2Phone will provide certain of such services to IDT for those periods of time set forth in the respective Ancillary Agreements. Effective as of the date hereof, each of IDT and Net2Phone will execute and deliver all of the Ancillary Agreements and the Tax Agreement. ARTICLE III INTER-COMPANY LICENSES 3.1 The parties may desire to provide each other from time to time, at their sole and absolute discretion, certain software, know-how, or other technology for which they have the rights to grant licenses to third parties ("Shared Technology") for use in the other party's business. To provide Shared Technology, the party granting rights (the "Granting Party") to such Shared Technology will identify the specific Shared Technology to be provided to the other party (the "Receiving Party") in a written notice (the "License Notice"), signed by a duly authorized representative of the Granting Party, 5 which references this Agreement and states that a license to such Shared Technology is being granted to the Receiving Party pursuant to the terms of this Agreement. The specific Shared Technology licensed pursuant to a given License Notice will be licensed under the following terms and conditions unless stated otherwise in such License Notice (provided that any changed or additional terms therein shall be subject to signed approval by both the Granting Party and the Receiving Party): (a) LICENSE GRANT. Granting Party will grant to Receiving Party a non- exclusive, non-transferable, royalty-free, revocable license to use, make, copy and practice the Shared Technology designated in the License Notice solely for internal business purposes. The term of the license granted herein shall be indefinite, provided, however, that Granting Party may revoke such license upon thirty (30) days prior written notice at any time and for any reason, or for no reason. (b) LIMITATIONS ON RIGHTS. Receiving Party will not modify, create derivative works based upon, translate, decompile, disassemble or otherwise reverse engineer, distribute, transfer, time-share, service bureau or otherwise provide any third parties access to, the Shared Technology licensed to it pursuant to an applicable License Notice, or permit any third party to do any of the foregoing.. (c) PROPRIETARY RIGHTS. Granting Party will retain all right, title and interest in and to the Shared Technology, and no right, title or interest will be deemed to be granted or transferred to Receiving Party, except as expressly provided for above or in the applicable License Notice. Receiving Party agrees to retain or reproduce any proprietary rights notices on all copies of the Shared Technology that it possesses or makes. (d) NO WARRANTY. EXCEPT AS OTHERWISE PROVIDED IN AN APPLICABLE LICENSE NOTICE, THE SHARED TECHNOLOGY IS PROVIDED "AS IS" WITHOUT WARRANTY OF ANY KIND AND THE PARTIES HEREBY DISCLAIM ALL WARRANTIES OF ANY KIND WITH RESPECT TO ANY OF THE SHARED TECHNOLOGY, INCLUDING, WITHOUT LIMITATION, ANY IMPLIED WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE. (e) LIMITATION OF LIABILITY. EXCEPT AS OTHERWISE PROVIDED IN AN APPLICABLE LICENSE NOTICE, NEITHER PARTY WILL BE LIABLE TO THE OTHER FOR ANY CONSEQUENTIAL, INCIDENTAL, SPECIAL, INDIRECT, EXEMPLARY OR PUNITIVE DAMAGES OF ANY KIND WITH RESPECT TO THE SHARED TECHNOLOGY, EVEN IF SUCH PARTY IS NOTIFIED OF THE POSSIBILITY OF SUCH DAMAGES. 6 ARTICLE IV OFFICE FURNITURE AND OFFICE EQUIPMENT 4.1 All office furniture and office equipment used by Net2Phone and located in its premises on the date hereof shall continue in the possession of Net2Phone. To the extent that any such office furniture or office equipment is, or becomes, legally owned by IDT, IDT hereby transfers all its right, title and interest therein to Net2Phone effective, with respect to such furniture and equipment currently owned by IDT, on the date hereof and effective, with respect to any such furniture and equipment which becomes owned by IDT at a future, on such date To the extent that any such office furniture or office equipment is leased by IDT, IDT hereby affirms its intent that such furniture and equipment is part of IDT's capital contribution to Net2Phone and indemnifies Net2Phone from any and all claims whenever raised by any lessor of such furniture and equipment. ARTICLE V INDEMNIFICATION 5.1. RELEASE OF EXISTING CLAIMS. (a) Except as provided in Section 5.1(c), effective as of the date hereof, Net2Phone does hereby, for itself, its respective Affiliates (other than any member of the IDT Group), successors and assigns, and all Persons who at any time prior to the date hereof have been stockholders, directors, officers, agents or employees of any member of the Net2Phone Group (in each case, in their respective capacities as such), remise, release and forever discharge each of IDT, its respective Affiliates (other than any member of the Net2Phone Group), successors and assigns, and all prior, current or future stockholders, directors, officers, agents or employees of IDT (in each case, in their respective capacities as such), and their respective heirs, executors, administrators, successors and assigns, from any and all Liabilities whatsoever, whether at law or in equity (including any right of contribution), whether arising under any contract or agreement, by operation of law or otherwise, existing or arising from all acts and events occurring or failing to occur or alleged to have occurred or to have failed to occur and all conditions existing or alleged to have existed on or before the date hereof between Net2Phone and IDT (including any contractual arrangements or arrangements existing or alleged to exist between them on or before the date hereof). (b) Except as provided in Section 5.1(c), effective as of the date hereof, IDT does hereby, for itself and its Affiliates (other than any member of the Net2Phone Group), successors and assigns, and all Persons who at any time prior to the date hereof have been stockholders, directors, officers, agents or employees of any member of the IDT Group (in each case, in their respective capacities as such), remise, release and forever discharge Net2Phone, the respective members of the Net2Phone Group, their respective Affiliates (other than any member of the IDT Group), successors and assigns, and all prior, current or future stockholders, directors, officers, agents or employees of any member of the Net2Phone Group (in each case, in their respective capacities as such), and their respective heirs, executors, administrators, successors and assigns, from any and all Liabilities whatsoever, whether at law or in equity (including any right of 7 contribution), whether arising under any contract or agreement, by operation of law or otherwise, existing or arising from all acts and events occurring or failing to occur or alleged to have occurred or to have failed to occur and all conditions existing or alleged to have existed on or before the date hereof between Net2Phone and IDT (including any contractual arrangements or arrangements existing or alleged to exist between them on or before the date hereof). (c) Nothing contained in Section 5.1(a) or (b) shall impair any right of any Person to enforce this Agreement, any Ancillary Agreement, or the Tax Agreement. Nothing contained in Section 5.1(a) or (b) shall release any Person from: (i) any Liability, contingent or otherwise, assumed, transferred, assigned or allocated to the Group of which such Person is a member in accordance with, or any other Liability of any member of any Group under, this Agreement, any Ancillary Agreement or the Tax Agreement; (ii) any Liability for the sale, lease, construction or receipt of goods, property or services purchased, obtained or used in the ordinary course of business by a member of one Group from a member of any other Group prior to the date hereof; (iii) any Liability for unpaid amounts for products or services or refunds owing on products or services due on a value-received basis for work done by a member of one Group at the request or on behalf of a member of another Group; (iv) any Liability that the parties may have with respect to indemnification or contribution pursuant to this Agreement for claims brought against the parties by third Persons, which Liability shall be governed by the provisions of this Article V and Article VI and, if applicable, the appropriate provisions of the Ancillary Agreements; or (v) in the case of Net2Phone, outstanding unpaid amounts as of the date hereof advanced to Net2Phone for working capital and fixed asset purchases and to reimburse IDT for bank finance charges incurred not to exceed $14 million, $7 million of which will be repaid with proceeds from Net2Phone's sale of equity in connection with its proposed initial public offering, with the remaining $7 million being repaid in full not later than 60 months following the date hereof, self amortizing at the interest rate of 9% per annum in equal monthly payments. (vi) in the case of Net2Phone, $7 million which was advanced by IDT to Netscape and $1 million which was advanced to IBM all of which will be repaid by Net2Phone to IDT out of the proceeds of the private offering. (vii) any Liability the release of which would result in the release of any Person other than a Person released pursuant to this Section 5.1; provided that the parties agree not to bring suit or permit any of their Subsidiaries to bring suit against any Person with respect to any Liability to the extent that such Person would be released with respect to such Liability by this Section 5.1 but for the provisions of this clause (vi). (viii) in the case if IDT, any Liability to Clifford Sobel pursuant to his 8 employment agreement (including option and stock conversion rights thereunder) or to any Net2Phone employee as a result of rights of such employee any employee benefit plan, including any stock option plan. (d) Net2Phone shall not make, and shall not permit any member of the Net2Phone Group to make, any claim or demand, or commence any Action asserting any claim or demand, including any claim of contribution or any indemnification, against IDT or any member of the IDT Group or any other Person released pursuant to Section 5.1(a), with respect to any Liabilities released pursuant to Section 5.1(a). IDT shall not, and shall not permit any member of the IDT Group, to make any claim or demand, or commence any Action asserting any claim or demand, including any claim of contribution or any indemnification, against Net2Phone or any member of the Net2Phone Group, or any other Person released pursuant to Section 5.1(b), with respect to any Liabilities released pursuant to Section 5.1(b). (e) It is the intent of each of IDT and Net2Phone by virtue of the provisions of this Section 5.1 to provide for a full and complete release and discharge of all Liabilities existing or arising from all acts and events occurring or failing to occur or alleged to have occurred or to have failed to occur and all conditions existing or alleged to have existed on or before the date hereof, between or among Net2Phone or any member of the Net2Phone Group, on the one hand, and IDT or any member of the IDT Group, on the other hand (including any contractual agreements or arrangements existing or alleged to exist between or among any such members on or before the date hereof), except as expressly set forth in Section 5.1(c). At any time, at the request of any other party, each party shall cause each member of its respective Group to execute and deliver releases reflecting the provisions hereof. 5.2. INDEMNIFICATION BY NET2PHONE. Except as provided in Section 5.4, Net2Phone shall indemnify, defend and hold harmless IDT, each member of the IDT Group and each of their respective directors, officers and employees (in each case, in their respective capacities as such), and each of the heirs, executors, successors and assigns of any of the foregoing (collectively, the "IDT Indemnitees"), from and against any and all Liabilities of the IDT Indemnitees relating to, arising out of or resulting from any of the following items (without duplication): (a) the failure of Net2Phone or any other member of the Net2Phone Group or any other Person to pay, perform or otherwise promptly discharge any liabilities of Net2Phone in accordance with their respective terms, whether prior to or after the date hereof; and (b) any breach by Net2Phone or any member of the Net2Phone Group of this Agreement, any of the Ancillary Agreements or the Tax Agreement; provided, --------- however, that Net2Phone shall not be financially responsible hereunder for any - -------- special, incidental, consequential or other similar type of damage to the extent that such damages are specifically excluded in such agreement. 5.3. INDEMNIFICATION BY IDT. Except as otherwise provided in Section 9 5.4, IDT shall indemnify, defend and hold harmless Net2Phone, each member of the Net2Phone Group and each of their respective directors, officers and employees (in each case, in their respective capacities as such), and each of the heirs, executors, successors and assigns of any of the foregoing (collectively, the "Net2Phone Indemnitees"), from and against any and all Liabilities of the Net2Phone Indemnitees relating to, arising out of or resulting from any of the following items (without duplication): (a) the failure of IDT or any other member of the IDT Group or any other Person to pay, perform or otherwise promptly discharge any Liabilities of the IDT Group, whether prior to or after the date hereof; and (b) any breach by IDT or any member of the IDT Group of this Agreement, any of the Ancillary Agreements or the Tax Agreement; provided, however, that IDT ------------------ shall not be financially responsible hereunder for any special, incidental, consequential or other similar type of damage to the extent that such damages are specifically excluded in such agreement. 5.4. INDEMNIFICATION OBLIGATIONS NET OF INSURANCE PROCEEDS AND OTHER AMOUNTS. (a) The parties intend that any Liability subject to indemnification or reimbursement pursuant to this Article V or Article VI will be net of Insurance Proceeds that actually reduce the amount of the Liability. Accordingly, the amount which any party (an "Indemnifying Party") is required to pay to any Person entitled to indemnification hereunder (an "Indemnitee") will be reduced by any Insurance Proceeds theretofore actually recovered by or on behalf of the Indemnitee in reduction of the related Liability. If an Indemnitee receives a payment (an "Indemnity Payment") required by this Agreement from an Indemnifying Party in respect of any Liability and subsequently receives Insurance Proceeds, then the Indemnitee will pay to the Indemnifying Party an amount equal to the excess of the Indemnity Payment received over the amount of the Indemnity Payment that would have been due if the Insurance Proceeds had been received, realized or recovered before the Indemnity Payment was made. (b) An insurer who would otherwise be obligated to pay any claim shall not be relieved of the responsibility with respect thereto or, solely by virtue of the indemnification provisions hereof, have any subrogation rights with respect thereto, it being expressly understood and agreed that no insurer or any other third party shall be entitled to a "windfall" (i.e., a benefit they would not be entitled to receive in the absence of the indemnification provisions) by virtue of the indemnification provisions hereof. Nothing contained in this Agreement, any Ancillary Agreement or the Tax Agreement shall obligate any member of any Group to seek to collect or recover any Insurance Proceeds. 5.5. PROCEDURES FOR INDEMNIFICATION OF THIRD PARTY CLAIMS. (a) If an Indemnitee shall receive notice or otherwise learn of the assertion by a Person (including any Governmental Authority) who is not a member of the IDT Group or the Net2Phone Group of any claim or of the commencement by any such Person of any Action (collectively, a "Third Party Claim") with respect to which an Indemnifying 10 Party may be obligated to provide indemnification to such Indemnitee pursuant to Section 5.2 or 5.3, or any other Section of this Agreement, any Ancillary Agreement or the Tax Agreement, such Indemnitee shall give such Indemnifying Party written notice thereof within 20 days after becoming aware of such Third Party Claim. Any such notice shall describe the Third Party Claim in reasonable detail. Notwithstanding the foregoing, the failure of any Indemnitee or other Person to give notice as provided in this Section 5.5(a) shall not relieve the related Indemnifying Party of its obligations under this Article V, except to the extent that such Indemnifying Party is actually prejudiced by such failure to give notice. (b) An Indemnifying Party may elect to defend (and, unless the Indemnifying Party has specified any reservations or exceptions, to seek to settle or compromise), at such Indemnifying Party's own expense and by such Indemnifying Party's own counsel, any Third Party Claim. Within 30 days after the receipt of notice from an Indemnitee in accordance with Section 5.5(a) (or sooner, if the nature of such Third Party Claim so requires), the Indemnifying Party shall notify the Indemnitee of its election whether the Indemnifying Party will assume responsibility for defending such Third Party Claim, which election shall specify any reservations or exceptions. After notice from an Indemnifying Party to an Indemnitee of its election to assume the defense of a Third Party Claim, such Indemnitee shall have the right to employ separate counsel and to participate in (but not control) the defense, compromise, or settlement thereof, but the fees and expenses of such counsel shall be the expense of such Indemnitee except as set forth in the next sentence. In the event that the Indemnifying Party has elected to assume the defense of the Third Party Claim but has specified, and continues to assert, any reservations or exceptions in such notice, then, in any such case, the reasonable fees and expenses of one separate counsel for all Indemnitees shall be borne by the Indemnifying Party. (c) If an Indemnifying Party elects not to assume responsibility for defending a Third Party Claim, or fails to notify an Indemnitee of its election as provided in Section 5.5(b), such Indemnitee may defend such Third Party Claim at the cost and expense of the Indemnifying Party. (d) Unless the Indemnifying Party has failed to assume the defense of the Third Party Claim in accordance with the terms of this Agreement, no Indemnitee may settle or compromise any Third Party Claim without the consent of the Indemnifying Party, which consent shall not be unreasonably withheld. (e) No Indemnifying Party shall consent to entry of any judgment or enter into any settlement of the Third Party Claim without the consent of the Indemnitee if the effect thereof is to permit any injunction, declaratory judgment, other order or other nonmonetary relief to be entered, directly or indirectly, against any Indemnitee. (f) The provisions of Section 5.5 and Section 5.6 shall not apply to Taxes (which are covered by the Tax Agreement). 5.6. ADDITIONAL MATTERS. (a) Any claim on account of a Liability which 11 does not result from a Third Party Claim shall be asserted by written notice given by the Indemnitee to the related Indemnifying Party. Such Indemnifying Party shall have a period of 30 days after the receipt of such notice within which to respond thereto. If such Indemnifying Party does not respond within such 30-day period, such Indemnifying Party shall be deemed to have refused to accept responsibility to make payment. If such Indemnifying Party does not respond within such 30-day period or rejects such claim in whole or in part, such Indemnitee shall be free to pursue such remedies as may be available to such party as contemplated by this Agreement, the Ancillary Agreements and the Tax Agreement. (b) In the event of payment by or on behalf of any Indemnifying Party to any Indemnitee in connection with any Third Party Claim, such Indemnifying Party shall be subrogated to and shall stand in the place of such Indemnitee as to any events or circumstances in respect of which such Indemnitee may have any right, defense or claim relating to such Third Party Claim against any claimant or plaintiff asserting such Third Party Claim or against any other person. Such Indemnitee shall cooperate with such Indemnifying Party in a reasonable manner, and at the cost and expense (including allocated costs of in-house counsel and other personnel) of such Indemnifying Party, in prosecuting any subrogated right, defense or claim. (c) In the event of an Action in which the Indemnifying Party is not a named defendant, if the Indemnifying Party shall so request, the parties shall endeavor to substitute the Indemnifying Party for the named defendant if at all practicable. If such substitution or addition cannot be achieved for any reason or is not requested, the named defendant shall allow the Indemnifying Party to manage the Action as set forth in this Section and the Indemnifying Party shall fully indemnify the named defendant against all costs of defending the Action (including court costs, sanctions imposed by a court, attorneys' fees, experts' fees and all other external expenses), the costs of any judgment or settlement, and the cost of any interest or penalties relating to any judgment or settlement. 5.7. REMEDIES CUMULATIVE. The remedies provided in this Article V shall be cumulative and, subject to the provisions of Article VIII, shall not preclude assertion by any Indemnitee of any other rights or the seeking of any and all other remedies against any Indemnifying Party. 5.8. SURVIVAL OF INDEMNITIES. The rights and obligations of each of IDT and Net2Phone and their respective Indemnitees under this Article V shall survive the sale or other transfer by any party of any Assets or businesses or the assignment by it of any Liabilities. 5.9 UNAVAILABILITY OF INDEMNITY. If the indemnification provided for in this Article V is held by a court of competent jurisdiction to be unavailable to an indemnified party with respect to any Liabilities referred to herein, the indemnifying party, in lieu of indemnifying such indemnified party hereunder, agrees to contribute to the amount paid or payable by such indemnified party as a result of such Liability in such proportion as is appropriate to reflect the relative fault of the indemnifying party on one 12 hand and of the indemnified party on the other in connection with the event that resulted in such Liability, as well as any other relevant equitable considerations. ARTICLE VI OPERATIONS AND CERTAIN OTHER MATTERS 6.1. INSURANCE MATTERS. (a) Net2Phone and IDT contemplate that Net2Phone shall obtain its own Directors and Officers Insurance Policy in a timely manner following the sale of equity to new investors. Each of Net2Phone and IDT agree that Net2Phone may remain on IDT's insurance policies relating to property, errors and omissions, professional liability, automobile and general liability until the earlier of such time as Net2Phone no longer qualifies for coverage on the respective IDT Insurance Policy or, upon thirty (30) days' prior written notice to IDT, Net2Phone elects to be removed from the IDT Insurance Policy or Policies. For so long as Net2Phone is covered by IDT's Insurance Policies, Net2Phone will pay to IDT each month (prorated on a daily basis for any partial month) in respect of the period from the date hereof until the termination of Net2Phone's coverage on all of IDT's Insurance Policies the amount calculated as set forth on Exhibit B hereto, such amount to be payable in arrears by the 10th --------- day of the next succeeding month, in respect of Insurance Policies under which Net2Phone will continue to have coverage following the date hereof. IDT and Net2Phone agree to cooperate in good faith to provide for the treatment of any Insurance Policies that will remain in effect following the date hereof on a mutually agreeable basis. IDT shall provide Net2Phone with prompt notice in the event that any Insurance Policy shall be terminated or otherwise cease to be in effect for any reason. In no event shall IDT, any other member of the IDT Group or any IDT Indemnitee have liability or obligation whatsoever to any member of the Net2Phone Group in the event (i) that any Insurance Policy or other contract or policy of insurance shall be terminated or otherwise cease to be in effect for any reason, shall be unavailable or inadequate to cover any Liability of any member of the Net2Phone Group for any reason whatsoever or shall not be renewed or extended beyond the current expiration date. or (ii) notwithstanding the provisions of the immediately preceding sentence, that IDT fails to provide Net2Phone with notice of any such event. (b) (i) Except as otherwise provided in any Ancillary Agreement, the parties intend by this Agreement that Net2Phone and each other member of the Net2Phone Group be successors-in-interest to all rights that any member of the Net2Phone Group may have as of the date hereof as a subsidiary, affiliate, division or department of IDT prior to the date hereof under any policy of insurance issued to IDT by any insurance carrier unaffiliated with IDT or under any agreements related to such policies executed and delivered prior to the date hereof, including any rights such member of the Net2Phone Group may have, as an insured or additional named insured, subsidiary, affiliate, division or department, to avail itself of any such policy of insurance or any such agreements related to such policies as in effect prior to the date hereof. At the request of Net2Phone, IDT shall take all reasonable steps, including the execution and delivery of any instruments, to effect the foregoing; provided, however that IDT shall not be required to pay any amounts, waive any rights or incur any Liabilities in connection therewith. 13 (ii) Except as otherwise contemplated by any Ancillary Agreement, after the date hereof, none of IDT or Net2Phone or any member of their respective Groups shall, without the consent of the other, provide any such insurance carrier with a release, or amend, modify or waive any rights under any such policy or agreement, if such release, amendment, modification or waiver would adversely affect any rights or potential rights of any member of the other Group thereunder; provided however that the foregoing shall not (A) preclude any member of any Group from presenting any claim or from exhausting any policy limit, (B) require any member of any Group to pay any premium or other amount or to incur any Liability, or (C) require any member of any Group to renew, extend or continue any policy in force. Each of Net2Phone and IDT will share such information as is reasonably necessary in order to permit the other to manage and conduct its insurance matters in an orderly fashion. (c) This Agreement shall not be considered as an attempted assignment of any policy of insurance or as a contract of insurance and shall not be construed to waive any right or remedy of any member of the IDT Group in respect of any Insurance Policy or any other contract or policy of insurance. (d) Net2Phone does hereby, for itself and each other member of the Net2Phone Group, agree that no member of the IDT Group or any IDT Indemnitee shall have any Liability whatsoever as a result of the insurance policies and practices of IDT and its Affiliates as in effect at any time prior to the date hereof, including as a result of the level or scope of any such insurance, the creditworthiness of any insurance carrier, the terms and conditions of any policy, the adequacy or timeliness of any notice to any insurance carrier with respect to any claim or potential claim or otherwise. (e) Nothing in this Agreement shall be deemed to restrict any member of the Net2Phone Group from acquiring at its own expense any other insurance policy in respect of any Liabilities or covering any period. 6.2. CERTAIN BUSINESS MATTERS. (a) Except as may be expressly set forth in Section 6.3 below or in any Ancillary Agreement, no member of any Group shall have any duty to refrain from (i) engaging in the same or similar activities or lines of business as any member of any other Group, (ii) doing business with any potential or actual supplier or customer of any member of any other Group, or (iii) engaging in, or refraining from, any other activities whatsoever relating to any of the potential or actual suppliers or customers of any member of any other Group. (b) Each of IDT and Net2Phone is aware that from time to time certain business opportunities may arise which more than one Group may be financially able to undertake, and which are, from their nature, in the line of more than one Group's business and are of practical advantage to more than one Group. In connection therewith, the parties agree that if, following the date hereof, any of IDT or Net2Phone acquires knowledge of an opportunity that meets the foregoing standard with respect to more than one Group, none of the IDT Group or the Net2Phone Group shall have any duty to communicate or offer such opportunity to any of the others and may pursue or acquire such opportunity for itself, or direct such opportunity to any other Person. 14 6.3. NON-COMPETITION. (a) IDT acknowledges that as the Parent of Net2Phone it and its Affiliates have become privy to certain confidential information and trade secrets of Net2Phone and further acknowledges that it will derive substantial benefits from the separation of IDT and Net2Phone and that purchasers of equity of Net2Phone will be making substantial investments in reliance upon the agreement contained in this Section 6.3 that the knowledge and expertise developed by Net2Phone and available to IDT will be preserved and will not be used in competition with Net2Phone. IDT hereby agrees that it is reasonable and necessary for the protection of Net2Phone that it agree, and accordingly IDT hereby does agree that, for a period of 36 months from the date hereof (the "Noncompetition Period"), neither IDT nor any member of the IDT Group will directly or indirectly, alone or in association with any other person, corporation, firm or business, engage in the Net2Phone Business any where in the world or become a stockholder, partner or owner of any other person, corporation, firm or business that is primarily engaged in the Net2Phone Business any where in the world; provided, however, that subject to Net2Phone's prior approval which shall not be - ----------------- unreasonably withheld, IDT or a member of the IDT Group may acquire a passive investment of up to 20% of another entity so long as IDT or such member of the IDT Group does not assist that entity in developing an Internet telephony business or otherwise engaging in the Net2Phone Business. (b) For a period of 36 months from the date hereof, neither IDT nor Net2Phone, nor any member of either such party's affiliated group, shall, whether for its own account or for the account of any other person, corporation, firm or business (other than Net2Phone or its Affiliates), solicit or endeavor to entice away from the other party, or otherwise interfere with the relationship of such other party with, any person who or which is employed on the date hereof by, or otherwise engaged to perform services for, the other party (including, but not limited to, any independent contractors or organizations), except to the extent that such other party agrees to release such employee or other service provider to the other party or such other party's affiliated group. General advertising for employment positions or general employment searches through a third party recruiter are not covered by this Section 6.3(b). (c) IDT expressly agrees that the covenants contained in Section 6.3(a) and Section 6.3(b) are reasonable and necessary for the protection of Net2Phone. The provisions of such Section 6.3(a) and Section 6.3(b) are separate and distinct commitments independent of each of the other provisions of such Sections. The invalidity or non-enforceability of this Section 6.3 in any respect shall not affect the validity or enforceability of this Section 6.3 in any other respect or of any other provisions of this Agreement. In the event that any provision of this Section 6.3 shall be held invalid or unenforceable by a court of competent jurisdiction by reason of the geographic or business scope or the duration thereof, such invalidity or unenforceability shall attach only to the scope or duration of such provision and shall not affect or render invalid or unenforceable any other provision of this Agreement, and, to the fullest extent permitted by law, this Agreement shall be construed as if the geographic or business scope or the duration of such provision had been more narrowly drafted so as not to be 15 invalid or unenforceable. (d) IDT acknowledges that Net2Phone would suffer irreparable harm if IDT were to breach the provisions of this Section 6.3 and that Net2Phone's remedy at law for any such breach is and will be insufficient and inadequate and that Net2Phone shall be entitled to equitable relief, including by way of temporary and permanent injunction, in addition to any remedies Net2Phone may have at law. 6.4. LATE PAYMENTS. Except as expressly provided to the contrary in this Agreement or in any Ancillary Agreement, any amount not paid when due pursuant to this Agreement, any Ancillary Agreement or the Tax Agreement shall accrue interest at a rate per annum equal to the Prime Rate plus 2% commencing upon the later of the (a) due date of such amount and (b) thirtieth day following such amount being invoiced or otherwise demanded in writing. ARTICLE VII EXCHANGE OF INFORMATION; CONFIDENTIALITY 7.1. AGREEMENT FOR EXCHANGE OF INFORMATION; ARCHIVES. (a) Each of IDT and Net2Phone, on behalf of its respective Group, agrees to provide, or cause to be provided, to the other Group, as soon as reasonably practicable after written request therefor, any Information in the possession or under the control of such Group which the requesting party reasonably needs (i) to comply with reporting, disclosure, filing or other requirements imposed on the requesting party (including under applicable securities or tax laws) by a Governmental Authority having jurisdiction over the requesting party, (ii) for use in any other judicial, regulatory, administrative, tax or other proceeding or in order to satisfy audit, accounting, claims, regulatory, litigation, tax or other similar requirements, or (iii) to comply with its obligations under this Agreement or any Ancillary Agreement; provided, however, that in the event that any party determines that any such provision of Information could be commercially detrimental, violate any law or agreement, or waive any attorney client privilege, the parties shall take all reasonable measures to permit the compliance with such obligations in a manner that avoids any such harm or consequence. (b) Net2Phone shall have access during regular business hours (as in effect from time to time) to the documents and objects of historic significance that relate to the business of Net2Phone that are located in the IDT Records to the extent such documents or objects have been specifically identified and requested by Net2Phone in advance or, if specific documents or objects have not been identified, to the extent Net2Phone has provided IDT with proper advance notice to request such access and the Net2Phone representative designated to receive such access is accompanied by an IDT representative. Net2Phone may obtain copies (but not originals) of documents for bona fide business purposes and may obtain objects for exhibition purposes for commercially reasonable periods of time if required for bona fide business purposes, provided that Net2Phone shall cause any such objects to be returned promptly in the same condition in which they were delivered to Net2Phone and Net2Phone shall comply with any rules, 16 procedures or other requirements, and shall be subject to any restrictions (including prohibitions on removal of specified objects), that are then applicable to IDT. Nothing herein shall be deemed to restrict the access of any member of the IDT Group to any such documents or objects or to impose any liability on any member of the IDT Group if any such documents or objects are not maintained or preserved by IDT. (c) After the date hereof, (i) Net2Phone shall maintain in effect at its own cost and expense adequate systems and controls to the extent necessary to enable the members of the IDT Group to satisfy their respective reporting, accounting, audit and other obligations, and (ii) Net2Phone shall in a timely manner provide, or cause to be provided, to IDT in such form as IDT shall request, at no charge to IDT, all financial and other data and information as IDT determines necessary or advisable in order to prepare IDT financial statements and reports or filings with any Governmental Authority. 7.2. OWNERSHIP OF INFORMATION. Any Information owned by one Group that is provided to a requesting party pursuant to Section 7.1 shall be deemed to remain the property of the providing party. Unless specifically set forth herein, nothing contained in this Agreement shall be construed as granting or conferring rights of license or otherwise in any such Information. 7.3. COMPENSATION FOR PROVIDING INFORMATION. The party requesting such Information agrees to reimburse the other party for the reasonable costs, if any, of creating, gathering and copying such Information, to the extent that such costs are incurred for the benefit of the requesting party. Except as may be otherwise specifically provided elsewhere in this Agreement or in any other agreement between the parties, such costs shall be computed in accordance with the providing party's standard methodology and procedures. 7.4. RECORD RETENTION. To facilitate the possible exchange of Information pursuant to this Article VII and other provisions of this Agreement after the date hereof, the parties agree to use their reasonable best efforts to retain all Information in their respective possession or control on the date hereof in accordance with the policies of IDT as in effect on the date hereof. No party will destroy, or permit any of its Subsidiaries to destroy, any Information which the other party may have the right to obtain pursuant to this Agreement prior to the third anniversary of the date hereof without first using its reasonable best efforts to notify the other party of the proposed destruction and giving the other party the opportunity to take possession of such information prior to such destruction; provided, however, that in the case of any Information relating to Taxes or to Environmental Liabilities, such period shall be extended to the expiration of the applicable statute of limitations (giving effect to any extensions thereof). 7.5. LIMITATION OF LIABILITY. No party shall have any liability to any other party in the event that any Information exchanged or provided pursuant to this Agreement which is an estimate or forecast, or which is based on an estimate or forecast, is found to be inaccurate, in the absence of willful misconduct by the party providing such Information. No party shall have any liability to any other party if any Information is destroyed after reasonable best efforts by such party to comply with the provisions of 17 7.6. OTHER AGREEMENTS PROVIDING FOR EXCHANGE OF INFORMATION. The rights and obligations granted under this Article VII are subject to any specific limitations, qualifications or additional provisions on the sharing, exchange or confidential treatment of Information set forth in any Ancillary Agreement. 7.7. PRODUCTION OF WITNESSES; RECORDS; COOPERATION. (a) After the date hereof, except in the case of an adversarial Action by one party against another party, each party hereto shall use its reasonable best efforts to make available to each other party, upon written request, the former, current and future directors, officers, employees, other personnel and agents of the members of its respective Group as witnesses and any books, records or other documents within its control or which it otherwise has the ability to make available, to the extent that any such person (giving consideration to business demands of such directors, officers, employees, other personnel and agents) or books, records or other documents may reasonably be required in connection with any Action in which the requesting party may from time to time be involved, regardless of whether such Action is a matter with respect to which indemnification may be sought hereunder. The requesting party shall bear all costs and expenses in connection therewith. (b) If an Indemnifying Party chooses to defend or to seek to compromise or settle any Third Party Claim, the other parties shall make available to such Indemnifying Party or such other party, as the case may be, upon written request, the former, current and future directors, officers, employees, other personnel and agents of the members of its respective Group as witnesses and any books, records or other documents within its control or which it otherwise has the ability to make available, to the extent that any such person (giving consideration to business demands of such directors, officers, employees, other personnel and agents) or books, records or other documents may reasonably be required in connection with such defense, settlement or compromise, or such prosecution, evaluation or pursuit, as the case may be, and shall otherwise cooperate in such defense, settlement or compromise, or such prosecution, evaluation or pursuit, as the case may be. (c) Without limiting the foregoing, the parties shall cooperate and consult to the extent reasonably necessary with respect to any Actions. (d) Without limiting any provision of this Section, each of the parties agrees to cooperate, and to cause each member of its respective Group to cooperate, with each other in the defense of any infringement or similar claim with respect to any intellectual property and shall not claim to acknowledge, or permit any member of its respective Group to claim to acknowledge, the validity or infringing use of any intellectual property of a third Person in a manner that would hamper or undermine the defense of such infringement or similar claim. (e) The obligation of the parties to provide witnesses pursuant to this Section 7.7 is intended to be interpreted in a manner so as to facilitate cooperation and shall include the obligation to provide as witnesses inventors and other officers without regard 18 to whether the witness or the employer of the witness could assert a possible business conflict (subject to the exception set forth in the first sentence of Section 7.7(a)). (f) In connection with any matter contemplated by this Section 7.7, the parties will enter into a mutually acceptable joint defense agreement so as to maintain to the extent practicable any applicable attorney-client privilege or work product immunity of any member of any Group. 7.8. CONFIDENTIALITY. (a) Subject to Section 7.9, each of IDT and Net2Phone, on behalf of itself and each member of its respective Group, agrees to hold, and to cause its respective directors, officers, employees, agents, accountants, counsel and other advisors and representatives to hold, in strict confidence, with at least the same degree of care that applies to IDT's confidential and proprietary information pursuant to policies in effect as of the date hereof, all Information concerning each such other Group that is either in its possession (including Information in its possession prior to either of the date hereof) or furnished by any such other Group or its respective directors, officers, employees, agents, accountants, counsel and other advisors and representatives at any time pursuant to this Agreement, any Ancillary Agreement, the Tax Agreement or otherwise, and shall not use any such Information other than for such purposes as shall be expressly permitted hereunder or thereunder, except, in each case, to the extent that such Information has been (i) in the public domain through no fault of such party or any member of such Group or any of their respective directors, officers, employees, agents, accountants, counsel and other advisors and representatives, (ii) later lawfully acquired from other sources by such party (or any member of such party's Group) which sources are not themselves bound by a confidentiality obligation), or (iii) independently generated without reference to any proprietary or confidential Information of the other party. (b) Each party agrees not to release or disclose, or permit to be released or disclosed, any such Information to any other Person, except its directors, officers, employees, agents, accountants, counsel and other advisors and representatives who need to know such Information (who shall be advised of their obligations hereunder with respect to such Information), except in compliance with Section 7.9. Without limiting the foregoing, when any Information is no longer needed for the purposes contemplated by this Agreement, any Ancillary Agreement, or the Tax Agreement, each party will promptly after request of the other party either return to the other party all Information in a tangible form (including all copies thereof and all notes, extracts or summaries based thereon) or certify to the other party that it has destroyed such Information (and such copies thereof and such notes, extracts or summaries based thereon). 7.9. PROTECTIVE ARRANGEMENTS. In the event that any party or any member of its Group either determines on the advice of its counsel that it is required to disclose any Information pursuant to applicable law or receives any demand under lawful process or from any Governmental Authority to disclose or provide Information of any other party (or any member of any other party's Group) that is subject to the confidentiality provisions hereof, such party shall notify the other party prior to disclosing or providing such Information and shall cooperate at the expense of the requesting party in seeking any reasonable protective arrangements requested by such 19 other party. Subject to the foregoing, the Person that received such request may thereafter disclose or provide Information to the extent required by such law (as so advised by counsel) or by lawful process or such Governmental Authority. ARTICLE VIII ARBITRATION; DISPUTE RESOLUTION 8.1. AGREEMENT TO ARBITRATE. Except as otherwise specifically provided in any Ancillary Agreement, the procedures for discussion, negotiation and arbitration set forth in this Article VIII shall apply to all disputes, controversies or claims (whether sounding in contract, tort or otherwise) that may arise out of or relate to, or arise under or in connection with this Agreement or any Ancillary Agreement, or the transactions contemplated hereby or thereby (including all actions taken in furtherance of the transactions contemplated hereby or thereby on or prior to the date hereof), or the commercial or economic relationship of the parties relating hereto or thereto, between or among any member of the IDT Group and the Net2Phone Group. Each party agrees on behalf of itself and each member of its respective Group that the procedures set forth in this Article VIII shall be the sole and exclusive remedy in connection with any dispute, controversy or claim relating to any of the foregoing matters and irrevocably waives any right to commence any Action in or before any Governmental Authority, except as expressly provided in Sections 8.7(b) and 8.8 and except to the extent provided under the Arbitration Act in the case of judicial review of arbitration results or awards. Each party on behalf of itself and each member of its respective Group irrevocably waives any right to any trial by jury with respect to any claim, controversy or dispute set forth in the first sentence of this Section 8.1. 8.2. ESCALATION. (a) It is the intent of the parties to use their respective reasonable best efforts to resolve expeditiously any dispute, controversy or claim between or among them with respect to the matters covered hereby that may arise from time to time on a mutually acceptable negotiated basis. In furtherance of the foregoing, any party involved in a dispute, controversy or claim shall deliver a notice (an "Escalation Notice") demanding an in-person meeting involving representatives of the parties at a senior level of management of the parties (or if the parties agree, of the appropriate strategic business unit or division within such entity). A copy of any such Escalation Notice shall be given to the Chief Financial Officer, or like officer or official, of each party involved in the dispute, controversy or claim (which copy shall state that it is an Escalation Notice pursuant to this Agreement). Any agenda, location or procedure for such discussions or negotiations between the parties may be established by the parties from time to time; provided, however, that the parties shall use their reasonable best efforts to meet within 30 days of the Escalation Notice. (b) The parties may, by mutual consent, retain a mediator to aid the parties in their discussions and negotiations by informally providing advice to the parties. Any opinion expressed by the mediator shall be strictly advisory and shall not be binding on the parties, nor shall any opinion expressed by the mediator be admissible in any arbitration proceedings. The mediator may be chosen from a list of mediators previously selected by the parties or by other agreement of the parties. Costs of the mediation shall 20 be borne equally by the parties involved in the matter, except that each party shall be responsible for its own expenses. Mediation is not a prerequisite to a demand for arbitration under Section 8.3. 8.3. DEMAND FOR ARBITRATION. (a) At any time after the first to occur of (i) the date of the meeting actually held pursuant to the applicable Escalation Notice or (ii) 45 days after the delivery of an Escalation Notice (as applicable, the "Arbitration Demand Date"), any party involved in the dispute, controversy or claim (regardless of whether such party delivered the Escalation Notice) may, unless the Applicable Deadline has occurred, make a written demand (the "Arbitration Demand Notice") that the dispute be resolved by binding arbitration, which Arbitration Demand Notice shall be given to the parties to the dispute, controversy or claim in the manner set forth in Section 10.5. In the event that any party shall deliver an Arbitration Demand Notice to another party, such other party may itself deliver an Arbitration Demand Notice to such first party with respect to any related dispute, controversy or claim with respect to which the Applicable Deadline has not passed without the requirement of delivering an Escalation Notice. No party may assert that the failure to resolve any matter during any discussions or negotiations, the course of conduct during the discussions or negotiations or the failure to agree on a mutually acceptable time, agenda, location or procedures for the meeting, in each case, as contemplated by Section 8.2, is a prerequisite to a demand for arbitration under Section 8.3. (b) Except as may be expressly provided in any Ancillary Agreement, any Arbitration Demand Notice may be given until one year and 45 days after the later of the occurrence of the act or event giving rise to the underlying claim or the date on which such act or event was, or should have been, in the exercise of reasonable due diligence, discovered by the party asserting the claim (as applicable and as it may in a particular case be specifically extended by the parties in writing, the "Applicable Deadline"). Any discussions, negotiations or mediations between the parties pursuant to this Agreement or otherwise will not toll the Applicable Deadline unless expressly agreed in writing by the parties. Each of the parties agrees on behalf of itself and each member of its Group that if an Arbitration Demand Notice with respect to a dispute, controversy or claim is not given prior to the expiration of the Applicable Deadline, as between or among the parties and the members of their Groups, such dispute, controversy or claim will be barred. Subject to Sections 8.7(b) and 8.8, upon delivery of an Arbitration Demand Notice pursuant to Section 8.3(a) prior to the Applicable Deadline, the dispute, controversy or claim shall be decided by a sole arbitrator in accordance with the rules set forth in this Article VIII. 8.4. ARBITRATORS. (a) Within 15 days after a valid Arbitration Demand Notice is given, the parties involved in the dispute, controversy or claim referenced therein shall attempt to select a sole arbitrator satisfactory to all such parties. (b) In the event that such parties are not able jointly to select a sole arbitrator within such 15-day period, such parties shall each appoint an arbitrator within 30 days after delivery of the Arbitration Demand Notice. If one party appoints an arbitrator within such time period and the other party or parties fail to appoint an arbitrator within such time period, the arbitrator appointed by the one party shall be the sole arbitrator of the 21 matter. (c) In the event that a sole arbitrator is not selected pursuant to paragraph (a) or (b) above and, instead, two or more arbitrators are selected pursuant to paragraph (b) above, the two or more arbitrators will, within 30 days after the appointment of the later of them to be appointed, select an additional arbitrator who shall act as the sole arbitrator of the dispute. After selection of such sole arbitrator, the initial arbitrators shall have no further role with respect to the dispute. In the event that the arbitrators so appointed do not, within 30 days after the appointment of the later of them to be appointed, agree on the selection of the sole arbitrator, any party involved in such dispute may apply to CPR, New York, New York to select the sole arbitrator, which selection shall be made by such organization within 30 days after such application. Any arbitrator selected pursuant to this paragraph (c) shall be disinterested with respect to any of the parties and the matter and shall be reasonably competent in the applicable subject matter. (d) The sole arbitrator selected pursuant to paragraph (a), (b) or (c) above will set a time for the hearing of the matter which will commence no later than 90 days after the date of appointment of the sole arbitrator pursuant to paragraph (a), (b) or (c) above and which hearing will be no longer than 30 days (unless in the judgment of the arbitrator the matter is unusually complex and sophisticated and thereby requires a longer time, in which event such hearing shall be no longer than 90 days). The final decision of such arbitrator will be rendered in writing to the parties not later than 60 days after the last hearing date, unless otherwise agreed by the parties in writing. (e) The place of any arbitration hereunder will be New York, New York, unless otherwise agreed by the parties. 8.5. HEARINGS. Within the time period specified in Section 8.4(d), the matter shall be presented to the arbitrator at a hearing by means of written submissions of memoranda and verified witness statements, filed simultaneously, and responses, if necessary in the judgment of the arbitrator or both the parties. If the arbitrator deems it to be essential to a fair resolution of the dispute, live cross-examination or direct examination may be permitted, but is not generally contemplated to be necessary. The arbitrator shall actively manage the arbitration with a view to achieving a just, speedy and cost-effective resolution of the dispute, claim or controversy. The arbitrator may, in his or her discretion, set time and other limits on the presentation of each party's case, its memoranda or other submissions, and refuse to receive any proffered evidence, which the arbitrator, in his or her discretion, finds to be cumulative, unnecessary, irrelevant or of low probative nature. Except as otherwise set forth herein, any arbitration hereunder will be conducted in accordance with the CPR Rules for Non-Administered Arbitration of Business Disputes then prevailing (except that the arbitration will not be conducted under the auspices of the CPR and the fee schedule of the CPR will not apply). Except as expressly set forth in Section 8.8(b), the decision of the arbitrator will be final and binding on the parties, and judgment thereon may be had and will be enforceable in any court having jurisdiction over the parties. Arbitration awards will bear interest at an annual rate of the Prime Rate plus 2% per annum. To the extent that the provisions of this Agreement and the prevailing rules of the CPR conflict, the provisions of this Agreement 22 shall govern. 8.6. DISCOVERY AND CERTAIN OTHER MATTERS. (a) Any party involved in the applicable dispute may request limited document production from the other party or parties of specific and expressly relevant documents, with the reasonable expenses of the producing party incurred in such production paid by the requesting party. Any such discovery (which rights to documents shall be substantially less than document discovery rights prevailing under the Federal Rules of Civil Procedure) shall be conducted expeditiously and shall not cause the hearing provided for in Section 8.5 to be adjourned except upon consent of all parties involved in the applicable dispute or upon an extraordinary showing of cause demonstrating that such adjournment is necessary to permit discovery essential to a party to the proceeding. Depositions, interrogatories or other forms of discovery (other than the document production set forth above) shall not occur except by consent of the parties involved in the applicable dispute. Disputes concerning the scope of document production and enforcement of the document production requests will be determined by written agreement of the parties involved in the applicable dispute or, failing such agreement, will be referred to the arbitrator for resolution. All discovery requests will be subject to the proprietary rights and rights of privilege of the parties, and the arbitrator will adopt procedures to protect such rights and to maintain the confidential treatment of the arbitration proceedings (except as may be required by law). Subject to the foregoing, the arbitrator shall have the power to issue subpoenas to compel the production of documents relevant to the dispute, controversy or claim. (b) The arbitrator shall have full power and authority to determine issues of arbitrability but shall otherwise be limited to interpreting or construing the applicable provisions of this Agreement or any Ancillary Agreement, and will have no authority or power to limit, expand, alter, amend, modify, revoke or suspend any condition or provision of this Agreement or any Ancillary Agreement; it being understood, however, that the arbitrator will have full authority to implement the provisions of this Agreement or any Ancillary Agreement, and to fashion appropriate remedies for breaches of this Agreement (including interim or permanent injunctive relief); provided that the arbitrator shall not have (i) any authority in excess of the authority a court having jurisdiction over the parties and the controversy or dispute would have absent these arbitration provisions or (ii) any right or power to award punitive or treble damages. It is the intention of the parties that in rendering a decision the arbitrator give effect to the applicable provisions of this Agreement and the Ancillary Agreements and follow applicable law (it being understood and agreed that this sentence shall not give rise to a right of judicial review of the arbitrator's award). (c) If a party fails or refuses to appear at and participate in an arbitration hearing after due notice, the arbitrator may hear and determine the controversy upon evidence produced by the appearing party. (d) Arbitration costs will be borne equally by each party involved in the matter, except that each party will be responsible for its own attorney's fees and other costs and expenses, including the costs of witnesses selected by such party. 23 8.7. CERTAIN ADDITIONAL MATTERS. (a) Any arbitration award shall be a bare award limited to a holding for or against a party and shall be without findings as to facts, issues or conclusions of law (including with respect to any matters relating to the validity or infringement of patents or patent applications) and shall be without a statement of the reasoning on which the award rests, but must be in adequate form so that a judgment of a court may be entered thereupon. Judgment upon any arbitration award hereunder may be entered in any court having jurisdiction thereof. (b) Prior to the time at which an arbitrator is appointed pursuant to Section 8.4, any party may seek one or more temporary restraining orders or preliminary injunctions in a court of competent jurisdiction if necessary in order to preserve and protect the status quo. Neither the request for, or grant or denial of, any such temporary restraining order or preliminary injunction shall be deemed a waiver of the obligation to arbitrate as set forth herein and the arbitrator may dissolve, continue or modify any such order. Any such temporary restraining order or preliminary injunction shall remain in effect until the first to occur of the expiration of the order in accordance with its terms or the dissolution thereof by the arbitrator. (c) Except as required by law, the parties shall hold, and shall cause their respective officers, directors, employees, agents and other representatives to hold, the existence, content and result of mediation or arbitration in confidence in accordance with the provisions of Article VIII and except as may be required in order to enforce any award. Each of the parties shall request that any mediator or arbitrator comply with such confidentiality requirement. (d) In the event that at any time the sole arbitrator shall fail to serve as an arbitrator for any reason, the parties shall select a new arbitrator who shall be disinterested as to the parties and the matter in accordance with the procedures set forth herein for the selection of the initial arbitrator. The extent, if any, to which testimony previously given shall be repeated or as to which the replacement arbitrator elects to rely on the stenographic record (if there is one) of such testimony shall be determined by the replacement arbitrator. 8.8. LIMITED COURT ACTIONS. (a) Notwithstanding anything herein to the contrary, in the event that any party reasonably determines the amount in controversy in any dispute, controversy or claim (or any series of related disputes, controversies or claims) under this Agreement or any Ancillary Agreement is, or is reasonably likely to be, in excess of $5 million and if such party desires to commence an Action in lieu of complying with the arbitration provisions of this Article, such party shall so state in its Arbitration Demand Notice. If the other parties to the arbitration do not agree that the amount in controversy in such dispute, controversy or claim (or such series of related disputes, controversies or claims) is, or is reasonably likely to be, in excess of $5 million, the arbitrator selected pursuant to Section 8.4 hereof shall decide whether the amount in controversy in such dispute, controversy or claim (or such series of related disputes, controversies or claims) is, or is reasonably likely to be, in excess of $5 million. The arbitrator shall set a date that is no later than ten days after the date of his or her appointment for submissions by the parties with respect to such issue. There shall not be 24 any discovery in connection with such issue. The arbitrator shall render his or her decision on such issue within five days of such date so set by the arbitrator. In the event that the arbitrator determines that the amount in controversy in such dispute, controversy or claim (or such series of related disputes, controversies or claims) is or is reasonably likely to be in excess of $5 million, the provisions of Sections 8.4(d) and (e), 8.5, 8.6, 8.7 and 8.10 hereof shall not apply and on or before (but, except as expressly set forth in Section 8.8(b), not after) the tenth business day after the date of such decision, any party to the arbitration may elect, in lieu of arbitration, to commence an Action with respect to such dispute, controversy or claim (or such series of related disputes, controversies or claims) in any court of competent jurisdiction. If the arbitrator does not so determine, the provisions of this Article (including with respect to time periods) shall apply as if no determinations were sought or made pursuant to this Section 8.8(a). (b) In the event that an arbitration award in excess of $5 million is issued in any arbitration proceeding commenced hereunder, any party may, within 60 days after the date of such award, submit the dispute, controversy or claim (or series of related disputes, controversies or claims) giving rise thereto to a court of competent jurisdiction, regardless of whether such party or any other party sought to commence an Action in lieu of proceeding with arbitration in accordance with Section 8.8(a). In such event, the applicable court may elect to rely on the record developed in the arbitration or, if it determines that it would be advisable in connection with the matter, allow the parties to seek additional discovery or to present additional evidence. Each party shall be entitled to present arguments to the court with respect to whether any such additional discovery or evidence shall be permitted and with respect to all other matters relating to the applicable dispute, controversy or claim (or series of related disputes, controversies or claims). 8.9. CONTINUITY OF SERVICE AND PERFORMANCE. Unless otherwise agreed in writing, the parties will continue to provide service and honor all other commitments under this Agreement and each Ancillary Agreement during the course of dispute resolution pursuant to the provisions of this Article VIII with respect to all matters not subject to such dispute, controversy or claim. 8.10. LAW GOVERNING ARBITRATION PROCEDURES. The interpretation of the provisions of this Article VIII, only insofar as they relate to the agreement to arbitrate and any procedures pursuant thereto, shall be governed by the Arbitration Act and other applicable federal law. In all other respects, the interpretation of this Agreement shall be governed as set forth in Section 10.2. ARTICLE IX FURTHER ASSURANCES AND ADDITIONAL COVENANTS 9.1. FURTHER ASSURANCES. (a) In addition to the actions specifically provided for elsewhere in this Agreement, each of the parties hereto shall use its reasonable best effort to take, or cause to be taken, all actions, and to do, or cause to be done, all things reasonably necessary, proper or advisable under applicable laws, regulations and agreements to consummate and make effective the transactions 25 contemplated by this Agreement, the Ancillary Agreements and the Tax Agreement. (b) Without limiting the foregoing, each party hereto shall cooperate with the other parties, and without any further consideration, but at the expense of the requesting party, to execute and deliver, or use its reasonable best efforts to cause to be executed and delivered, all instruments, including instruments of conveyance, assignment and transfer, and to make all filings with, and to obtain all consents, approvals or authorizations of, any Governmental Authority or any other Person under any permit, license, agreement, indenture or other instrument and to take all such other actions as such party may reasonably be requested to take by any other party hereto from time to time, consistent with the terms of this Agreement and the Ancillary Agreements, in order to effectuate the provisions and purposes of this Agreement and the Ancillary Agreements and the other transactions contemplated hereby and thereby. Without limiting the foregoing, to the extent necessary to effectuate the provisions and purposes of this Agreement and the Ancillary Agreements and the other transactions contemplated hereby and thereby each party will, at the reasonable request, cost and expense of any other party, take such other actions as may be reasonably necessary to vest in such other party good and marketable title, free and clear of any Security Interest, if and to the extent it is practicable to do so. (c) IDT and Net2Phone, and each of the members of their respective Groups, waive (and agree not to assert against any of the others) any claim or demand that any of them may have against any of the others for any Liabilities or other claims relating to or arising out of: (i) the failure of Net2Phone or any member of the Net2Phone Group, on the one hand, or of IDT or any member of the IDT Group, on the other hand, to provide any notification or disclosure required under any state Environmental Law in connection with the transactions contemplated by this Agreement, or (ii) any inadequate, incorrect or incomplete notification or disclosure under any such state Environmental Law by the applicable transferor. (d) Following the date hereof, if one or more of the parties identifies any commercial or other service that is needed to assure a smooth and orderly transition of the businesses in connection with the consummation of the transactions contemplated hereby, and that is not otherwise governed by the provisions of this Agreement or any Ancillary Agreement, the parties will cooperate in determining whether there is a mutually acceptable arm's-length basis on which one or more of the other parties will provide such service. ARTICLE X MISCELLANEOUS 10.1. COUNTERPARTS; ENTIRE AGREEMENT; CORPORATE POWER. (a) This Agreement may be executed in one or more counterparts, all of which shall be considered one and the same agreement, and shall become effective when one or more counterparts have been signed by each of the parties and delivered to the other party. 26 (b) This Agreement, and the Exhibits, Schedules and Appendices hereto, contain the entire agreement between the parties with respect to the subject matter hereof, supersede all previous agreements, negotiations, discussions, writings, understandings, commitments and conversations with respect to such subject matter and there are no agreements or understandings between the parties other than those set forth or referred to herein or therein. (c) IDT represents on behalf of itself and each other member of the IDT Group and Net2Phone represents on behalf of itself and each other member of the Net2Phone Group as follows: (i) each such Person has the requisite corporate or other power and authority and has taken all corporate or other action necessary in order to execute, deliver and perform each of this Agreement, each of the Ancillary Agreements and the Tax Agreement to which it is a party and to consummate the transactions contemplated hereby and thereby; and (ii) this Agreement, each Ancillary Agreement and the Tax Agreement to which it is a party has been duly executed and delivered by it and constitutes a valid and binding agreement of it enforceable in accordance with the terms thereof subject to (a) the laws of bankruptcy and laws effecting creditors' rights generally and (b) the availability of equitable remedies. 10.2. GOVERNING LAW. Except as set forth in Section 8.10, this Agreement shall be governed by and construed and interpreted in accordance with the laws of the State of New York (other than as to its laws of arbitration which shall be governed under the Arbitration Act or other applicable federal law pursuant to Section 8.10), irrespective of the choice of laws principles of the State of New York, as to all matters, including matters of validity, construction, effect, enforceability, performance and remedies. 10.3. ASSIGNABILITY. Except as set forth in any Ancillary Agreement or the Tax Agreement, this Agreement (including without limitation the provisions of Section 6.3 hereof), each Ancillary Agreement and the Tax Agreement shall be binding upon and inure to the benefit of the parties hereto and thereto, respectively, and their respective successors and assigns (whether by merger, operation of law or otherwise); provided, however, that no party hereto or thereto may assign its respective rights or delegate its respective obligations under this Agreement, any Ancillary Agreement or the Tax Agreement without the express prior written consent of the other parties hereto or thereto. 10.4. THIRD PARTY BENEFICIARIES. Except for the indemnification rights under this Agreement of any IDT Indemnitee or Net2Phone Indemnitee in their respective capacities as such, (a) the provisions of this Agreement, each Ancillary Agreement and the Tax Agreement are solely for the benefit of the parties and are not intended to confer upon any Person except the parties any rights or remedies hereunder, and (b) there are no third party beneficiaries of this Agreement, any Ancillary Agreement or the Tax Agreement and none of this Agreement, any Ancillary Agreement or the Tax Agreement shall provide any third person with any remedy, claim, liability, 27 reimbursement, claim of action or other right in excess of those existing without reference to this Agreement, any Ancillary Agreement or the Tax Agreement. No party hereto shall have any right, remedy or claim with respect to any provision of this Agreement, any Ancillary Agreement or the Tax Agreement to the extent such provision relates solely to the other two parties hereto or the members of such other two parties' respective Groups. 10.5. NOTICES. All notices requests, demands, waivers and other communications under this Agreement, any Ancillary Agreement or the Tax Agreement shall be in writing and shall be deemed to have been duly given if delivered personally or by facsimile transmission or mailed (certified or registered mail, postage prepaid, return receipt requested): If to IDT, to: IDT Corporation 190 Main Street Hackensack, New Jersey 07601 Attention: Chief Financial Officer Fax No.: (201) 907-5165 If to Net2Phone: Net2Phone, Inc. 171 Main Street Hackensack, New Jersey 07601 Attention: Chief Financial Officer Fax No.: (201) 907-5351 or to such other person or address as any party shall specify by notice in writing to the other party. All such notices, requests, demands, waivers and communications shall be deemed to have been received on the date on which hand delivered, upon transmission of the facsimile transmission by the sender and issuance by the transmitting machine of a confirmation slip confirming that the number of pages constituting the notice have been transmitted without error, or on the third business day following the date on which so mailed, except for a notice of change of address, which shall be effective only upon receipt thereof. In the case of a notice sent by facsimile transmission, the sender shall contemporaneously mail a copy of the notice to the addressee at the address provided for above. However, such mailing shall in no way alter the time at which the facsimile notice is deemed received. In no event shall the provision of notice pursuant to this Section 10.5 constitute notice for service of process. 10.6. SEVERABILITY. If any provision of this Agreement, any Ancillary Agreement or the Tax Agreement or the application thereof to any Person or circumstance is determined by a court of competent jurisdiction to be invalid, void or unenforceable, the remaining provisions hereof or thereof, or the application of such provision to Persons or circumstances or in jurisdictions other than those as to which it has been held invalid or unenforceable, shall remain in full force and effect and shall in no way be affected, impaired or invalidated thereby, so long as the economic or legal substance of the transactions contemplated hereby or thereby, as the case may be, is not affected in any manner adverse to any party. Upon such determination, the parties shall 28 negotiate in good faith in an effort to agree upon such a suitable and equitable provision to effect the original intent of the parties. 10.7. FORCE MAJEURE. No party shall be deemed in default of this Agreement, any Ancillary Agreement or the Tax Agreement to the extent that any delay or failure in the performance of its obligations under this Agreement, any Ancillary Agreement or the Tax Agreement results from any cause beyond its reasonable control and without its fault or negligence, such as acts of God, acts of civil or military authority, embargoes, epidemics, war, riots, insurrections, fires, explosions, earthquakes, floods, unusually severe weather conditions, labor problems or unavailability of parts, or, in the case of computer systems, any failure in electrical or air conditioning equipment. In the event of any such excused delay, the time for performance shall be extended for a period equal to the time lost by reason of the delay. 10.8. PUBLICITY. Each of Net2Phone and IDT shall consult with each other prior to issuing any press releases or otherwise making public statements with respect to the other transactions contemplated hereby and prior to making any filings with any Governmental Authority with respect thereto. 10.9. HEADINGS. The article, section and paragraph headings contained in this Agreement and in the Ancillary Agreements and the Tax Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement, any Ancillary Agreement or the Tax Agreement. 10.10. SURVIVAL OF COVENANTS. Except as expressly set forth in any Ancillary Agreement and the Tax Agreement, the covenants, representations and warranties contained in this Agreement, each Ancillary Agreement and the Tax Agreement, and liability for the breach of any obligations contained herein, shall survive the delivery hereof. 10.11. WAIVERS OF DEFAULT. Waiver by any party of any default by the other party of any provision of this Agreement, any Ancillary Agreement or the Tax Agreement shall not be deemed a waiver by the waiving party of any subsequent or other default, nor shall it prejudice the rights of the other party. 10.12. SPECIFIC PERFORMANCE. In the event of any actual or threatened default in, or breach of, any of the terms, conditions and provisions of this Agreement, any Ancillary Agreement or the Tax Agreement, the party or parties who are or are to be thereby aggrieved shall have the right to specific performance and injunctive or other equitable relief of its rights under this Agreement, such Ancillary Agreement or the Tax Agreement, in addition to any and all other rights and remedies at law or in equity, and all such rights and remedies shall be cumulative. The parties agree that the remedies at law for any breach or threatened breach, including monetary damages, are inadequate compensation for any loss and that any defense in any action for specific performance that a remedy at law would be adequate is waived. Any requirements for the securing or posting of any bond with such remedy are waived. 29 10.13. AMENDMENTS. No provisions of this Agreement, any Ancillary Agreement or the Tax Agreement shall be deemed waived, amended, supplemented or modified by any party, unless such waiver, amendment, supplement or modification is in writing and signed by the authorized representative of the party against whom it is sought to enforce such waiver, amendment, supplement or modification. 10.14. INTERPRETATION. Words in the singular shall be held to include the plural and vice versa and words of one gender shall be held to include the other genders as the context requires. The terms "hereof," "herein," and "herewith" and words of similar import shall, unless otherwise stated, be construed to refer to this Agreement (or the applicable Ancillary Agreement or the Tax Agreement) as a whole (including all of the Schedules, Exhibits and Appendices hereto and thereto) and not to any particular provision of this Agreement (or such Ancillary Agreement or the Tax Agreement). Article, Section, Exhibit, Schedule and Appendix references are to the Articles, Sections, Exhibits, Schedules and Appendices to this Agreement (or the applicable Ancillary Agreement or the Tax Agreement) unless otherwise specified. The word "including" and words of similar import when used in this Agreement (or the applicable Ancillary Agreement or the Tax Agreement) shall mean "including, without limitation," unless the context otherwise requires or unless otherwise specified. 30 IN WITNESS WHEREOF, the parties have caused this Separation Agreement to be executed by their duly authorized representatives as of the date first above written. IDT CORPORATION By: /s/ Hal Brecher -------------------------------- Name: Hal Brecher Title: Chief Operating Officer NET2PHONE, INC. By: /s/ Howard Balter -------------------------------- Name: Howard Balter Title: Chief Executive Officer 31 EXHIBIT A --------- The provision of and developmental efforts related to Internet telephony services and voice enabling Web applications. EX-10.26 9 CO-LOCATION & FACILITIES MGMT. SERVICES AGREEMENT EXHIBIT 10.26 CO-LOCATION AND FACILITIES MANAGEMENT SERVICES AGREEMENT This Co-location and Facilities Management Services Agreement (this "Agreement") is made effective as of the 20th day of May, 1999 by and between IDT Corporation, a Delaware corporation having an office at 225 Old New Brunswick Road, Piscataway, NJ and Net2Phone, Inc., a Delaware corporation having an office at 171 Main Street, Hackensack, NJ. WHEREAS, IDT has entered into an agreement with 225 Old NB Road, Inc. ("Landlord") pursuant to which IDT uses and occupies approximately 22,000 square feet of space (the "Premises") located within that certain building located at 225 Old New Brunswick Road, Piscataway, New Jersey ("Building"); and, WHEREAS, IDT desires to license to Net2Phone, and Net2Phone desires to license from IDT, the right to use and occupy space within the Premises (the "Equipment Space") as shown on Exhibit B attached to and made a part hereof to locate certain internet telephony equipment (the "Equipment"); and WHEREAS, IDT has agreed to provide, and Net2Phone desires to receive, co- location and facilities management services based upon the terms and conditions set forth herein. NOW THEREFORE, in consideration of the mutual covenants and agreements hereinafter set forth, and in consideration of the foregoing recitals, each of which is incorporated in and made a part of this Agreement, the parties hereto, intending to be legally bound, hereby agree as follows: 1. PERMISSIBLE USE IDT hereby licenses the Equipment Space to Net2Phone, and Net2Phone hereby licenses the Equipment space from IDT upon and subject to the terms, covenants, rentals and conditions herein set forth for the purpose of locating internet telephony equipment therein. 2. UTILITIES AND TECHNICAL UNDERTAKINGS IDT shall at all times during the Term of this Agreement maintain or cause the maintenance of the back-up generator, electrical system and equipment and heating, ventilating and air-conditioning system and equipment (collectively, "Utility Systems") serving the Equipment Space in good condition and repair, adequate at all times to provide, without interruption, all of the Services described in this Agreement. IDT currently employs technical staff to maintain and manage technical facilities. Upon Net2Phone's request, IDT's technical staff shall perform necessary technical work related specifically to Net2Phone owned or leased equipment and/or provide technical services to Net2Phone's facilities on a "time and material" basis as set forth in Exhibit A. Such work and or services will be performed only at Net2Phone's written request (including via email) and under Net2Phone's direction. 3. ADDITIONAL TERMS GOVERNING THE USE OF THE EQUIPMENT SPACE; INSTALLATION OF EQUIPMENT a. Net2Phone shall not make any construction changes or material alterations to the interior or exterior portions of the Equipment Space or Premises, including building of walls or partitions, drop ceilings, lighting, hvac, plumbing or any electrical distribution or power supplies for equipment. IDT shall exclusively perform and manage any construction or material alterations within the Equipment Space and Premises at rates to be negotiated between the parties hereto, which rates shall not exceed the generally prevailing market rate that is then being charged to perform such services. b. Net2Phone's use of the Equipment Space, installation of Equipment, and access to the Premises shall at all times be subject to Net2Phone's adherence to generally accepted industry standards for facility security and rules of conduct provided, however, Net2Phone shall be permitted to use the Equipment Space and shall have access through the Premises to the Equipment Space, twenty-four (24) hours per day, three hundred sixty-five (365) days per year. c. Net2Phone shall not market, license or sell co-location services in the Equipment Space to any third party such that Net2Phone is using the Equipment Space to compete with IDT, except that Net2Phone is permitted, subject to IDT's prior written consent, to allow its vendors and customers to co-locate within the Equipment Space if such co- location is needed for purposes of permitting the vendor or customer to connect to Net2Phone's network. However, Net2Phone may not market, license or sell co-location services in the Equipment Space to other local, inter-exchange, long distance carriers, or Internet service providers, or other such service providers or carriers for the purpose of such carriers or service providers utilizing the Premises or the Building as a point of presence from which the service provider or carrier would provision interconnect services to other users within the Premises or the Building. If Net2Phone should provide or attempt to make available to any third party use of the Equipment Space without obtaining the prior written consent of IDT, Net2Phone shall be in breach of this Agreement and IDT may pursue any legal or equitable remedy it is entitled to pursue under Paragraph 9 of this Agreement. 4. PAYMENT a. Net2Phone shall pay IDT a monthly recurring fee for use and occupancy of the Equipment Space (the "Occupancy Fee") as set forth in the attached 2 Exhibit A. If Net2Phone requests that IDT provide services not delineated herein or in Exhibit A, Net2Phone agrees to pay IDT's then current standard charge for such service in effect at the time such service was rendered or such charge as the parties may mutually agree upon prior to the delivery of the service. b. Commencing on the Commencement Date, monthly installments of the Occupancy Fee shall be payable in advance on the first day of each calendar month. c. Both IDT and Net2Phone agree to reimburse the other for all reasonable repair or restoration costs associated with damage or destruction caused by their own personnel, agents, suppliers, contractors or visitors or as a consequence of any removal of Equipment or other property installed in the Equipment Space or the Premises. Such reimbursement shall be made within thirty (30) days of the damage or destruction. d. The monthly charges for all services used shall be payable in U.S. dollars within thirty (30) days from the date of IDT's invoice. Payment shall be remitted to IDT at the address set forth in Paragraph 13 and will not be deemed to have been made until the funds are received by IDT. e. Any payment (including monthly service charges due under this Paragraph or any other amount due hereunder) not made when due will be subject to a late charge or one and one-half percent (1.5%) per month. 5. HOURLY RATES FOR ADDITIONAL SERVICES When IDT technical support assistance is requested by Net2Phone for resolution or coordination of problems, Net2Phone agrees to pay IDT a per hour rate set forth in Exhibit A. IDT will inform Net2Phone in advance, if any services to be performed by IDT for Net2Phone are billable and IDT will provide Net2Phone with a reasonable estimate prior to performance of the services. For any services that it may require, Net2Phone shall contact IDT customer service as specified in Paragraph 13. 6. INTERCONNECT SERVICES a. IDT shall arrange for all interconnection facilities within the Premises. All interconnection facilities arranged by IDT shall be provisioned solely to the Net2Phone occupied Equipment Space within the Premises. All costs and arrangements for local interconnects will be Net2Phone's responsibility, unless otherwise agreed to by the parties in writing. When Net2Phone utilizes IDT's services under this Paragraph 6(a), Net2Phone's facilities management personnel must coordinate with IDT in the exchange of technical information relating to their requirements for local interconnect in order for IDT to provide the necessary support to Net2Phone with the provisioning and installation of the interconnect 3 facilities. In addition, for all services to be provided by IDT under this Paragraph 6(a), Net2Phone agrees to provide IDT notice at least ten (10) days prior to the commencement date of the services. Coordination regarding exchange of technical information relating to local interconnects shall be provided to IDT as specified in Paragraph 13. b. Upon Net2Phone's written request, IDT shall, on an as required basis, provide cross-connect services to Net2Phone to allow Net2Phone to interconnect with the various local exchange and competitive access providers that are located within the meet-me area of the Premises. In such event, IDT shall invoice and Net2Phone shall pay to IDT the Dispatch Labor Charges as specified in Exhibit A. c. Upon Net2Phone's written request, IDT shall, on an as required basis, act as Net2Phone's agent in the turning-up of local interconnects and to provide on-going loop maintenance between the Premises and any third-party facilities of Net2Phone's customers. In such event, IDT shall invoice and Net2Phone shall pay to IDT the Dispatch Labor Charges as specified in Exhibit A. d. All interconnects must be at the OC3, STM-1, DS3, or DS1 level utilizing up to 28 T1's per DS3, 24 ports per DS1. The interface point for IDT's service will be IDT's DSX "CROSS-CONNECT" panel. 7. FORCE MAJEURE Neither party shall be liable for any failure or delay in performance to the extent caused by causes beyond its reasonable control, including, without limitation, labor disputes, fires or other casualties, weather or natural disasters, damage to facilities, or the conduct of third parties ("Force Majeure"). 8. EMERGENCIES AND INTERRUPTIONS a. In case of an interruption or failure of any of the services furnished hereunder, including but not limited to power, back-up power, hvac, transmission and internet services (the "Services"), IDT shall use commercially reasonable efforts to restore service as soon as possible. If IDT elects, it may substitute a reasonably equivalent service. IDT's liability for all mistakes, errors, omissions, interruptions, delays or defects in Services occurring in the course of engineering, installation and operation of its system or the provision of Services shall in no event exceed the charges paid by Net2Phone for the Services during the two months preceding the outage. In no event shall IDT be liable for any special, consequential or incidental damages. b. In the event Net2Phone experiences an interruption of power services for any cause within IDT's control, which results in the loss of Net2Phone's 4 service for a period of twenty-four (24) hours or more in any single event or for more than ninety-six (96) hours in any consecutive six (6) month period, or if IDT fails to promptly commence or diligently pursue restoration of any interrupted power services, Net2Phone shall have the right to terminate this Agreement upon ten (10) days notice to IDT. c. In the event Net2Phone experiences an interruption of back-up power which is the direct result of IDT's Landlord's negligence or willful misconduct, IDT shall pay to Net2Phone, it's proportionate share (based upon the ratio of the gross area of the Equipment Space to the gross area of the Premises) of any damages collected by IDT from its Landlord for such interruption of back-up power. d. IDT shall at all times during the term of this Agreement maintain a required operating temperature of 65-87 degrees Fahrenheit. In the event Net2Phone experiences an interruption of hvac services for any cause within IDT's control, which lasts for more than one (1) day, the Occupancy Fee shall be abated from the second day until the date on which such hvac services are restored, and if such hvac services are not restored within ten (10) days, or if IDT fails to promptly commence or diligently pursue restoration of the interrupted hvac services, Net2Phone shall have the right to terminate this Agreement upon ten (10) days notice to IDT. e. In the event Net2Phone experiences an interruption of transmission services for reasons other than Force Majeure which results in the loss of Net2Phone's service for a period of seventy-two (72) hours or more in any single event or for more than one hundred sixty-eight (168) hours in any consecutive six (6) month period, Net2Phone shall have the right to terminate this Agreement upon ten (10) days notice to IDT. 9. DEFAULT. a. Either party shall be in default if it fails to timely perform its material obligations under this Agreement or becomes the subject of any voluntary proceedings under any bankruptcy or insolvency laws, or becomes the subject of any involuntary proceedings under any bankruptcy or involvency laws which are not dismissed or withdrawn within sixty (60) days after the filing thereof. Upon such default by a party (other than a service interruption as described in Paragraph 9 hereof), the other party shall provide written notice to the defaulting party within ten (10) days of such default, allowing thirty (30) days for the default to be cured. If the default is not cured within that thirty (30) days, the non-defaulting party may, upon ten (10) days notice to the other, terminate this Agreement, and pursue all other available remedies at law and in equity, all of which shall be cumulative. 5 b. If this Agreement or any addendum is terminated by IDT during the Term as a result of Net2Phone's material default or is terminated by Net2Phone in the absence of a material default hereunder by IDT (in either case, an "Net2Phone Termination"), Net2Phone shall be liable to IDT for liquidated damages (due to the difficulty in projecting and establishing actual damages) for the terminated Services, as provided for below: i. If a Net2Phone Termination occurs within twenty-four (24) months from the Commencement Date, then, Net2Phone shall pay to IDT forty (40%) percent of the monthly Occupancy and related Fees for the remainder of the Term. ii. If a Net2Phone Termination occurs after twenty-four (24) months but prior to forty-eight (48) months from the Commencement Date, then, Net2Phone shall pay to IDT twenty (20%) percent of the monthly Occupancy and related Fees for the remainder of the Term. iii. If a Net2Phone Termination occurs after forty-eight (48) months but prior to sixty (60) months from the Commencement Date, then Net2Phone shall pay to IDT ten (10%) percent of the monthly Occupancy and related Fees for the remainder of the Term. c. Only in the event of a Net2Phone default and subsequent to an IDT termination of the Services for cause, the parties shall agree upon the amount of any reconnect charges, increase in service rates and/or security deposit required hereunder, prior to any reinstatement of the Services by IDT; it being understood, however, that in the event of a termination by IDT for cause, IDT may sell the Services to others. d. Upon termination or expiration of the Term of this Agreement, Net2Phone agrees to remove the Equipment and other property which was installed by Net2Phone or Net2Phone's agents. Net2Phone shall promptly reimburse IDT for all costs associated with the repair and restoration of the Equipment Space, the Premises and the Building affected by the removal of such Equipment. In the event such Equipment or property has not been removed within fifteen (15) days following the effective termination or expiration date, IDT shall have the right to remove, relocate, or otherwise store such Equipment or property at Net2Phone's expense. 10. TERM OF THIS AGREEMENT The term (the "Term") of this Agreement shall be for a period of three (3) years commencing on the effective date of this Agreement (the "Commencement Date"). After the expiration of such three (3) year period, this Agreement shall remain in force on a month to month basis until terminated by either party upon thirty (30) days written notice. 6 11. APPROVALS Net2Phone shall be responsible to obtain and maintain all approvals and permits necessary for Net2Phone's use of the Equipment Space. 12. INDEMNIFICATION The parties shall indemnify each other against all losses, claims damages, expenses and liabilities (including reasonable attorneys' fees and court costs) to extent caused by a willful or negligent act or omission of such party. 13. NOTICES AND OTHER COMMUNICATIONS a. Documentation and coordination regarding exchange of technical information relating to local interconnects, and notification for assistance, resolution or coordination of service, and other notices under this Agreement shall be sent to: If to IDT: Kathy Timko IDT Corporation 225 Old New Brunswick Road Piscataway, New Jersey And if of a legal nature: Copy to: IDT Legal Department 190 Main Street Hackensack, New Jersey If to Net2Phone: Gary Lundner Net2Phone, Inc. 171 Main Street Hackensack, New Jersey And if of a legal nature: Copy to: Net2Phone Legal Department 171 Main Street Hackensack, New Jersey 7 14. INSURANCE a. Net2Phone agrees to maintain, at Net2Phone's expense, during the entire time this Agreement is in effect for the Premises (i) Comprehensive General Liability Insurance in an amount not less than one million dollars ($1,000,000.00) per occurrence for bodily injury or property damage, (ii) Employer's Liability in an amount not less than one million dollars ($1,000,000.00) per occurrence, (iii) Worker's Compensation in an amount not less than that prescribed by statutory limits, and (iv) adequate insurance coverage to protect Net2Phone owned Equipment and property installed within the Equipment Space. Under no circumstances shall IDT be obligated to provide insurance coverage for any Net2Phone owned Equipment or property installed within the IDT Premises. However, Net2Phone may satisfy the foregoing insurance obligations under the existing policies of insurance of IDT, at IDT's discretion, so long as Net2Phone qualifies as a subsidiary of IDT as defined in such policies of insurance; in which event, Net2Phone shall be responsible for the Net2Phone portion of the cost to IDT of such insurance. Net2Phone shall furnish IDT with certificates of insurance which evidence the minimum levels of insurance set forth herein and which, if not an IDT policy, name IDT as an additional insured upon request by IDT. b. IDT agrees to maintain, at IDT's expense, during the entire time this Agreement is in effect (i) Comprehensive General Liability Insurance in an amount not less than one million dollars ($1,000,000.00) per occurrence for bodily injury or property damage, (ii) Employer's Liability in an amount not less than Five Hundred Thousand Dollars ($500,000.00) per occurrence, and (iii) Worker's Compensation in an amount not less than that prescribed by statutory limits. IDT shall furnish Net2Phone with certificates of insurance which evidence the minimum levels of insurance set forth herein upon request. 15. MISCELLANEOUS a. This Agreement may not be assigned by either party in whole or in part without the prior written consent of the other party, which consent shall not be unreasonably withheld, except that Net2Phone and IDT shall have the right to assign this Agreement to an affiliate or division, provided that IDT or Net2Phone exercise management control over and/or own a controlling interest in or are under common control with such affiliate or division. Notwithstanding the foregoing restriction on the assignment of this Agreement, (i) any direct or indirect transfer of the share capital of IDT or Net2Phone shall not be considered an assignment of this Agreement, and (ii) both IDT and Net2Phone shall have the unrestricted right to assign its rights and obligations under this Agreement to any individual, corporation or other business entity which acquires all or substantially all of its shares or assets and upon such assignment, the 8 assigning party shall be released of all of its obligations under this Agreement arising from and after the date of such assignment. b. The terms and provisions of this Agreement may only be waived, modified or changed by an amendment in writing signed by both parties hereto. No failure by either party to insist upon the other's performance of any obligation hereunder shall constitute a waiver of the obligation unless in writing. c. If any provision of this Agreement shall be determined to be invalid or unenforceable, the remainder of the Agreement shall continue in full force and effect. d. This Agreement and the rights and obligations of the parties hereto shall be governed in all respects by the laws of the State of New Jersey (without regard to the principles of conflicts of laws). Each party shall comply with all applicable federal, state and local laws. The parties hereby solely subject themselves to the jurisdiction of the State of New Jersey, for the resolution of any dispute arising hereunder and agree that venue in any suit filed in those courts shall be proper. e. This Agreement may be executed in two or more counterparts, each of which shall be an original, and all of which, taken together, shall constitute one and the same Agreement. f. Both IDT and Net2Phone each represent and warrant to the other that the person executing this Agreement (or any amendments and changes) on its behalf is its duly authorized representative. g. Net2Phone covenants and represents that it has negotiated this Agreement directly with IDT, and has not acted by implication or otherwise to authorize or authorized any other broker, salesman, or finder to act for it in the negotiation and execution of this Agreement and agrees to defend, indemnify and hold harmless IDT from any and all claims by any such broker, salesman or finder for a commission or finder's fee as a result of Net2Phone having entered into this Agreement. h. This Agreement and any documents attached hereto constitute the entire Agreement between the parties and supersede all prior agreements, whether written or oral, with respect to the subject matter contained herein. In case of any conflict between this Agreement and the terms of any documents attached hereto, the terms of the documents attached shall control insofar as the services covered thereby are concerned. 9 IN WITNESS WHEREOF, the undersigned hereby acknowledges that they have read and fully understand the foregoing Agreement and, further, that they agree to each of the terms and conditions contained herein. Agreed and Accepted: Net2Phone, Inc. By: /s/ David Greenblatt Print: David Greenblatt ----------------------------- --------------------------------- Date: 5/20/99 Title: Chief Operating Officer --------------------------- --------------------------------- Agreed and Accepted: IDT Corporation By: /s/ Joyce Mason Print: Joyce Mason ----------------------------- --------------------------------- Date: 5/20/99 Title: Senior Vice Presdient & Secretary --------------------------- --------------------------------- 10 Exhibit A- RATES CO-LOCATION AND FACILITIES MANAGEMENT SERVICE AGREEMENT CLIENT: Net2Phone 1. Address of Co-location Center: 225 Old New Brunswick Road, Piscataway, NJ ----------------------------- 2. Initial Space Allocation: 14 racks. ------------------------ 3. Initial Term: Years (3) years. ------------- 4. Monthly Recurring Occupancy Fees: $600 per month, per rack --------------------------------- 5. Additional Occupancy Fees: Payable at the times and in the amounts as -------------------------- agreed by Net2Phone and IDT when additional services are requested by Net2Phone. 6. Dispatch Labor Charges: The following charges apply to work done on ----------------------- Net2Phone's behalf on Net2Phone equipment located in the Equipment space ("Dispatch Labor Charges"). a. Normal IDT business hours (Mon. - Fri. 8:00 a.m. to 5:00 p.m. except IDT holidays) will be billed to Net2Phone at the rate of $75.00 per hour with a one (1) hour minimum. b. Off-hour support shall be billed at a rate of $125.00 per hours with a two (2) hour minimum (All other times and IDT holidays). c. Dispatch Labor Charges apply only if Net2Phone's requests and authorizes dispatch of IDT personnel to perform work on Net2Phone's behalf. IDT reserves the right to accept or reject any such requests. IDT dispatch of personnel to work on Net2Phone's equipment is also premised on Net2Phone furnishing instruction to IDT prior to commencement of any work. 7. Additional space within the Premises: Additional space made available to ------------------------------------- Net2Phone by IDT will be provided to Net2Phone according to the terms, conditions and rates in force at the time of the Net2Phone request. 11 EX-21.01 10 SUBSIDIARIES OF THE REGISTRANT Exhibit 21.01 IDT Corporation List of Subsidiaries IDT America, Corp. IDT International Corp. IDT Internet Services, Inc. Internet Online Services, Inc. Media Response, Inc. Net2Phone, Inc. Rock Enterprises, Inc. Yovelle Renaissance Corporation Genie Interactive, Inc. InterExchange, Inc. Nuestra Voz Direct Inc. Union Telecard Alliance, LLC. 225 Old NB Road, Inc. IDT Europe B.V. IDT Debit Card Limited IDT Global Limited EX-23.01 11 CONSENT OF ERNST & YOUNG LLP Exhibit 23.1 Consent of Independent Auditors We consent to the incorporation by reference of our report dated October 1, 1999 with respect to the consolidated financial statements and schedule of IDT Corporation included in this Annual Report (Form 10-K) for the year ended July 31, 1999, in each of the following: . Registration Statement No. 333-61565 on Form S-3; . Registration Statement No. 333-71991 on Form S-8; . Registration Statement No. 333-73167 on Form S-8; . Registration Statement No. 333-80133 on Form S-3; and . Registration Statement No. 333-73167 on Form S-3. ERNST & YOUNG LLP New York, New York November 2, 1999 EX-27.01 12 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM IDT'S FISCAL 1999 FINANCIAL STATEMENTS, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. YEAR JUL-31-1999 AUG-01-1998 JUL-31-1999 52,903,479 77,869,655 113,789,127 7,643,000 0 292,198,280 151,472,278 37,349,355 515,336,254 112,783,537 0 0 0 239,829 253,165,506 515,336,254 732,183,855 732,183,855 575,049,683 729,803,484 0 5,558,000 11,318,964 20,727,886 17,850,000 6,186,438 0 (3,269,787) 0 2,916,651 (0.70) (0.70)
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